OGZD.L Regulatory News (OGZD)

29 Apr 2009 13:04

OAO GAZPROM

IFRS CONSOLIDATED FINANCIAL STATEMENTS 

31 DECEMBER 2008

  

PricewaterhouseCoopers

INDEPENDENT AUDITOR'S REPORT

To the Shareholders and Board of Directors of OAO Gazprom

1 We have audited the accompanying consolidated financial statements of OAO Gazprom and its subsidiaries (the "Group") which comprise the consolidated balance sheet as at 31 December 2008 and the consolidated statement of income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended and a summary of significant accounting policies and other explanatory notes.

Management's Responsibility for the Financial Statements

2 Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. 

Auditor's Responsibility

3 Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement. 

4 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. 

5 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 

Opinion

6 In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as of 31 December 2008, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

7 Without qualifying our opinion, we draw your attention to Notes 24 and 36 to the consolidated financial statements. The Government of the Russian Federation has a controlling interest in OAO Gazprom and Governmental economic and social policies affect the Group's financial position, results of operations and cash flows.

Moscow, Russian Federation

29 April 2009

The firm is an authorized licensee of the tradename and logo of PricewaterhouseCoopers.

	IFRS Consolidated Balance Sheet as of 31 December 2008	31 December
Notes	(In millions of Russian Roubles)	2008		2007
	Assets
	Current assets
8	Cash and cash equivalents	343,833		279,109
8	Restricted cash	3,747		12,025
9	Short-term financial assets	23,448		113,911
10	Accounts receivable and prepayments	675,934		697,464
11	Inventories	276,954		245,406
	VAT recoverable	115,878		122,558
	Other current assets	132,281		95,944
		1,572,075		1,566,417
	Non-current assets
12, 35	Property, plant and equipment	4,020,522		3,490,477
13, 35	Investments in associated undertakings and jointly controlled entities	772,143		670,403
14	Long-term accounts receivable and prepayments	343,805		402,382
15	Available-for-sale long-term financial assets	48,186		256,210
16	Other non-current assets	411,837		406,667
		5,596,493		5,226,139
	Total assets	7,168,568		6,792,556
	Liabilities and equity
	Current liabilities
17	Accounts payable and accrued charges	466,757		485,466
21	Current profit tax payable	6,774		23,033
18	Other taxes payable	50,622		50,530
19	Short-term borrowings and current portion of long-term borrowings	432,640		504,070
19	Short-term promissory notes payable	8,052		21,455
		964,845		1,084,554
	Non-current liabilities
20	Long-term borrowings	923,230		981,408
20	Long-term promissory notes payable	1,718		3,555
23	Provisions for liabilities and charges	85,807		79,213
21	Deferred tax liabilities	265,279		308,353
	Other non-current liabilities	14,590		22,376
		1,290,624		1,394,905
	Total liabilities	2,255,469		2,479,459
	Equity
24	Share capital	325,194		325,194
24	Treasury shares	(597)		(20,801)
24	Retained earnings and other reserves	4,280,518		3,646,396
		4,605,115		3,950,789
32	Minority interest	307,984		362,308
	Total equity	4,913,099		4,313,097
	Total liabilities and equity	7,168,568		6,792,556

A.B. Miller E.A. Vasilieva

Chairman of the Management Committee Chief Accountant

___________________ 2009 ______________________ 2009

The accompanying are an integral part of these consolidated financial statements.

	IFRS Consolidated Statement of Income  for the year ended 31 December 2008		Year ended 31 December
Notes	(In millions of Russian Roubles)		2008		2007
25	Sales		3,518,960		2,423,245
26	Operating expenses		(2,159,690)		(1,713,759)
35	Impairment provision and other provisions		(98,964)		(7,708)
	Operating profit		1,260,306		701,778
	Gain from sale of interest in subsidiary		-		50,853
	Gain (loss) from change in fair value of call option		(50,738)		50,738
	Deconsolidation of NPF Gazfund		-		44,692
27	Finance income		165,603		159,380
27	Finance expense		(341,179)		(132,573)
13, 35	Share of net income (loss) of associated undertakings and  jointly controlled entities		(16,686)		24,234
	Gain on available-for-sale financial assets		14,326		25,102
	Profit before profit tax		1,031,632		924,204
	Current profit tax expense		(307,094)		(218,266)
	Deferred profit tax expense		46,842		(10,953)
21	Profit tax expense		(260,252)		(229,219)
	Profit for the year		771,380		694,985
	Attributable to:
	Equity holders of OAO Gazprom		742,928		658,038
32	Minority interest		28,452		36,947
			771,380		694,985
29	Basic and diluted earnings per share for profit attributable to the equity holders of OAO Gazprom (in Roubles)		31.49		28.07

A.B. Miller E.A. Vasilieva

Chairman of the Management Committee Chief Accountant

___________________ 2009 ______________________ 2009

The accompanying are an integral part of these consolidated financial statements.

	IFRS Consolidated Statement of Cash Flow for the year ended 31 December 2008 (In millions of Russian Roubles)	Year ended 31 December
Notes		2008	2007
	Operating activities
30	Net cash provided by operating activities	1,016,551	598,508
	Investing activities
12	Capital expenditures	(714,714)	(543,420)
	Net change in loans made	(38,084)	(11,289)
	Interest received	41,314	70,154
12	Interest paid and capitalised	(28,001)	(19,661)
	Acquisition of subsidiaries, net of cash acquired	1,514	(6,749)
13	Investment in associated undertakings and jointly controlled entities	(121,639)	(340,401)
	Decrease in cash due to NPF Gazfund deconsolidation	-	(18,518)
34	Decrease in cash due to Gazprombank Group deconsolidation	(47,242)	-
	Proceeds from sales of interest in subsidiary	5,875	21,434
	Proceeds from associated undertakings and jointly controlled entities	33,159	10,487
	Purchases of long-term available-for-sale financial assets	(20,649)	(64,929)
	Change in other long-term assets	(7,131)	10,651
	Net cash used for investing activities	(895,598)	(892,241)
	Financing activities
20	Proceeds from long-term borrowings (including current portion)	217,248	658,802
20	Repayment of long-term borrowings (including current portion)	(336,818)	(198,527)
	Net proceeds (repayment of) from issue of promissory notes	1,417	(96,030)
19	Net proceeds from short-term borrowings	185,386	70,901
24	Dividends paid	(68,013)	(69,329)
	Interest paid	(55,225)	(74,152)
24	Purchases of treasury shares	(113,763)	(659,223)
24	Sales of treasury shares	107,400	676,933
8	Change in restricted cash	(6,525)	331
	Net cash (used for) provided by financing activities	(68,893)	309,706
	Effect of exchange rate changes on cash and cash equivalents	12,664	(6,088)
	Increase in cash and cash equivalents	64,724	9,885
	Cash and cash equivalents, at the beginning of reporting year	279,109	269,224
	Cash and cash equivalents, at the end of the year	343,833	279,109

A.B. Miller E.A. Vasilieva

Chairman of the Management Committee Chief Accountant

___________________ 2009 ______________________ 2009

The accompanying are an integral part of these consolidated financial statements.

I IFRS Consolidated Statement of Changes in Equity for the year ended 31 December 2008 (In millions of Russian Roubles)
			Attributable to  equity holders of OAO Gazprom
Notes		Number of shares outstanding (billions)	Share capital	Treasury shares	Retained earnings and other reserves	Total	Minority interest	Total equity
	Balance as of 31 December 2006	22.9	325,194	(41,801)	2,905,065	3,188,458	161,362	3,349,820
	Gains arising from change in fair value of available-for-sale financial assets		-	-	21,201	21,201	-	21,201
24	Translation differences				4,829	4,829	-	4,829
	Net gain recognised directly in equity		-	-	26,030	26,030	-	26,030
	Profit for the year		-	-	658,038	658,038	36,947	694,985
	Total recognised income for the year		-	-	684,068	684,068	36,947	721,015
24	Net treasury shares transactions	0.1	-	12,162	3,631	15,793	-	15,793
24	Return of social assets to governmental authorities		-	-	(3,897)	(3,897)	-	(3,897)
24	Dividends		-	-	(59,765)	(59,765)	(9,320)	(69,085)
	Deconsolidation of NPF Gazfund	0.6	-	8,838	111,015	119,853	90,844	210,697
	Acquisition of the controlling interest in OAO Mosenergo		-	-	6,279	6,279	61,964	68,243
	Disposal of shares in subsidiaries		-	-	-	-	20,511	20,511
	Balance as of 31 December 2007	23.6	325,194	(20,801)	3,646,396	3,950,789	362,308	4,313,097
15	Losses arising from change in fair   value of available-for-sale financial  assets		-	-	(58,105)	(58,105)	-	(58,105)
	Change in equity of associated undertakings and jointly  controlled entities		-	-	(4,972)	(4,972)	-	(4,972)
24	Translation differences		-	-	19,220	19,220	1,120	20,340
	Net (loss) gain recognised directly in equity		-	-	(43,857)	(43,857)	1,120	(42,737)
	Profit for the year		-	-	742,928	742,928	28,452	771,380
	Total recognised income for the year		-	-	699,071	699,071	29,572	728,643
24	Net treasury shares transactions	0.0	-	(6,547)	184	(6,363)	-	(6,363)
24	Return of social assets to governmental authorities		-	-	(2,519)	(2,519)	-	(2,519)
24	Dividends		-	-	(62,614)	(62,614)	(6,227)	(68,841)
34	Deconsolidation of Gazprombank Group	0.0	-	26,751	-	26,751	(148,035)	(121,284)
33	Acquisition of the controlling interest in OAO WGC-2 and OAO WGC-6		-	-	-	-	61,632	61,632
	Acquisition and disposals of shares in subsidiaries (including additional shares issue)		-	-	-	-	8,734	8,734
	Balance as of 31 December 2008	23.6	325,194	(597)	4,280,518	4,605,115	307,984	4,913,099

A.B. Miller E.A. Vasilieva

Chairman of the Management Committee Chief Accountant

___________________ 2009 ______________________ 2009

The accompanying are an integral part of these consolidated financial statements.

NATURE OF OPERATIONS 

OAO Gazprom and its subsidiaries (the "Group") operate one of the largest gas pipeline systems in the world and are responsible for substantially all gas production and high pressure gas transportation in the Russian Federation. The Group is also a major exporter of gas to European countries. The Group is engaged in oil production, refining activities and electricity generation.

The Group is involved in the following principal activities: 

Exploration and production of gas;

Transportation of gas;

Domestic and export sale of gas;

Production of crude oil and gas condensate; and

Processing of oil, gas condensate and other hydrocarbons, and sales of refined products.

Other activities primarily comprise electric and heat energy generation and sales, storage of gas and construction.

The weighted average number of full time employees during 2008 and 2007 was 456 thousand and 445 thousand, respectively. 

2. ECONOMIC ENVIRONMENT IN THE RUSSIAN FEDERATION

The Russian Federation continues to display certain characteristics of an emerging market, including relatively high inflation. Also as discussed in Note 35 and 38 the Russian economy has been impacted by the recent turmoil in the financial markets, economic downturn, drop in oil prices and Rouble devaluation. Management is unable to fully predict all developments which could have an impact on Russia and gas importing countries and the banking sector and consequently what effect, if any, they could have on financial position of the Group.

3. BASIS OF PRESENTATION

These consolidated financial statements are prepared in accordance with, and comply with, International Financial Reporting Standards, including International Accounting Standards and Interpretations issued by the International Accounting Standards Board ("IFRS"). 

The consolidated financial statements of the Group are prepared under the historical cost convention except for certain financial instruments as described in Note 5. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated (see Note 5).

4. SCOPE OF CONSOLIDATION

In July 2008, the Group obtained control over OAO WGC-2 and OAO WGC-6 with ownership interests amounting to 57.3% and 60.1%, respectively (see Note 33). In these financial statements, management revised the preliminary assessment disclosed in interim condensed financial information for the nine months, ended September 30, 2008. Revisions made to the preliminary assessment applied in interim financial information were reflected as of the acquisition date.

At the general shareholders meeting of OAO Gazprombank on 24 June 2008, the shareholders elected the new Board of Directors. Five out of twelve newly elected Board members are representatives of OAO Gazprom. As a result of the change in the Board composition effective 24 June 2008 the Group lost its ability to control the financial and operating policies of the bank and its subsidiaries, including ОАО Sibur Holding and its subsidiaries and Gazprom-Media Group (the "Gazprombank Group") and ceased to consolidate OAO Gazprombank and its subsidiaries. As the Group has retained significant influence over Gazprombank Group, it is accounted under the equity method of accounting (see Note 34).

In the first quarter of 2007 the Group ceased to consolidate the non-governmental pension fund, NPF Gazfund. 

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  

The principal accounting policies followed by the Group are set out below.

5.1 Group accounting

Subsidiary undertakings

The Group's subsidiaries are entities over which the Group has the power to govern the financial and operating policies so as to obtain benefits from the activities of those entities. Subsidiary undertakings in which the Group, directly or indirectly, has an interest of more than 50% of the voting rights and is able to exercise control over the operations have been consolidated. Also subsidiary undertakings include entities in which the Group controls less than 50% of the voting share capital but where the Group controls the entity through other means. This may include a history of casting the majority of the votes at the meetings of the board of directors or equivalent governing body.

Certain entities in which the Group has an interest of more than 50% are recorded as investments in associated undertakings as the Group is unable to exercise control due to certain factors, for example restrictions stated in foundation documents.

The consolidated financial statements of the Group reflect the results of operations of any subsidiaries acquired from the date control is established. Subsidiaries are no longer consolidated from the date from which control ceases. All intercompany transactions, balances and unrealized surpluses and deficits on transactions between group companies have been eliminated. Separate disclosure is made for minority interests.

The purchase method of accounting is used to account for the acquisition of subsidiaries, including those entities and businesses that are under common control. The cost of an acquisition is measured at the fair value of the assets given up, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. The date of exchange is the acquisition date where a business combination is achieved in a single transaction, and is the date of each share purchase where a business combination is achieved in stages by successive share purchases. 

Goodwill and minority interest

Goodwill represents the excess of the cost of an acquisition over the fair value of the acquirer's share of the net identifiable assets, liabilities and contingent liabilities of the acquired subsidiary or associate at the date acquisition. Any excess of the fair value of the acquirer's share of the net identifiable assets, liabilities and contingent liabilities of the acquired subsidiary or associate at the date of acquisition over the cost of an acquisition is recognized in the statement of income. Goodwill is tested annually for impairment as well as when there are indications of impairment. For the purpose of impairment testing goodwill is allocated to the cash generating units that are expected to benefit from synergies from the combination.

When a business combination involves more than one transaction any adjustment to those fair values relating to previously held interests of the Group is recognised as a revaluation in equity. No such revaluation is made when the Group acquires an additional minority interest in subsidiaries.

Any premiums paid in excess of the carrying amount of the respective portion of minority interest at the date of acquisition of an additional interest in subsidiaries are recognized in goodwill.

Minority interest represents that portion of the profit or loss and net assets of a subsidiary attributable to equity interests that are not owned, directly or indirectly through subsidiaries, by the parent. In accordance with the provisions of IFRS 3 "Business Combinations", the acquirer recognises the acquiree's identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria at their fair values at the acquisition date, and any minority interest in the acquiree is stated at the minority's proportion of the net fair value of those items. 

Associated undertakings, jointly controlled entities and joint ventures

Associated undertakings are undertakings over which the Group has significant influence and that are neither a subsidiary nor an interest in a joint venture. Significant influence occurs when the Group has the power to participate in the financial and operating policy decisions of an entity but has no control or joint control over those policies. Associated undertakings are accounted for using the equity method.

The equity method involves recognising in the consolidated statement of income the Group's share of the associated undertakings' profit or loss for the year. Unrealised gains on transactions between the Group and its associated undertakings are eliminated to the extent of the Group's interest in the associated undertakings; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The Group's interest in each associated undertaking is carried in the consolidated balance sheet at an amount that reflects cost, including the goodwill at acquisition, the Group's share of profit and losses and its share of post-acquisition movements in reserves recognized in equity. Provisions are recorded for any impairment in value.

Recognition of losses under equity accounting is discontinued when the carrying amount of the investment in an associated undertaking reaches zero, unless the Group has incurred obligations or guaranteed obligations in respect of the associated undertaking.

Joint ventures are contractual agreements whereby two or more parties undertake economic activity, which is subject to joint control. Joint ventures related to jointly controlled entities are entities which are jointly controlled by two or more parties and investments in such entities are accounted for using the equity method. 

Joint ventures involving jointly controlled assets or joint operations are accounted for using the proportionate consolidation method.

 

5.2  Non derivative financial assets

The Group classifies its financial assets in the following categories: (a) financial assets at fair value through profit or loss, (b) available-for-sale financial assets, and (c) loans and receivables. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition and re-evaluates this designation which determines the method for measuring financial assets at subsequent balance sheet date: amortised cost or fair value. 

(a) Financial assets at fair value through profit or loss

This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Assets in this category are classified as current assets if they are expected to be realized within 12 months of the balance sheet date. There were no financial assets designated at fair value through profit or loss at inception as of 31 December 2008 and 2007.

Gains and losses arising from changes in the fair value of the "financial assets at fair value through profit or loss" category are included in the consolidated statement of income in the period in which they arise. 

(b) Available-for-sale financial assets

Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date. 

Available-for-sale financial assets are measured at fair value at inception and subsequently. Investments in quoted equity instruments classified as available-for-sale financial assets are measured at quoted market prices as of the reporting date. Investments in equity instruments for which there are no available market quotations are accounted for fair value. The fair value of unquoted debt instruments classified as available-for-sale financial assets is determined using discounted cash flow valuation techniques based on prevailing market interest rate for similar instruments.

Gains and losses arising from changes in the fair value of securities classified as available-for-sale are recognized in equity and shown net of income tax in the consolidated statement of changes in equity. When securities classified as available-for-sale are sold, the accumulated fair value adjustments are included in the consolidated statement of income as gains (losses) on disposal of available-for-sale financial assets. Interest income on available-for-sale debt instruments calculated using the effective interest method is recognized in the consolidated statement of income. 

(c) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Financial assets classified as loans and receivables are carried at amortized cost using the effective interest method. Gains and losses are recognized in the consolidated statement of income when the loans and receivables are derecognized or impaired, as well as through the amortization process.

Loans and receivables are included in current assets, except for maturities greater than 12 months after the balance sheet date which are classified as non-current assets.

Impairment of financial assets

At each balance sheet date the Group assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. 

5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss - is removed from equity and recognised in the consolidated statement of income. The impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment was recognised. For financial assets measured at amortized cost and available-for-sale financial assets which represent debt instruments, the reversal is recognised in profit or loss. For available-for-sale financial assets which represent equity instruments, the reversal is recognised directly in equity. Impairment losses relating to assets recognised at cost cannot be reversed.

The provision for impairment of accounts receivable is established if there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 12 months overdue) are considered indicators that the receivable is impaired. The amount of the provision is the difference between the carrying amount and the recoverable amount, being the present value of expected cash flows, discounted at the market rate of interest for similar borrowings at the date of origination of the receivable. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the statement of income within operating expenses. 

5.3 Derivative financial instruments

As part of trading activities, primarily by the banking subsidiaries, the Group is also party to derivative financial instruments including forward and options contracts in foreign exchange, commodities, and securities. The Group's policy is to measure these instruments at fair value, with resultant gains or losses being reported within the consolidated statement of income. The fair value of derivatives financial instruments is determined using actual market data information and valuation techniques based on prevailing market interest rate for similar instruments as appropriate. The Group has no derivatives accounted for as hedges.

The Group routinely enters into sale and purchase transactions for the purchase and sales of gas, oil, oil products and other goods. The majority of these transactions are entered to meet supply requirements to fulfill contract obligations and for own consumption and are not within the scope of IAS 39 "Financial instruments: recognition and measurement".

Derivative contracts embedded into sales-purchase contracts are separated from the host contracts and accounted for separately. Derivatives are carried at fair value with gains and losses arising from changes in the fair values of derivatives included in the consolidated income statement in the period in which they arise.

5.4 Options on purchase or sale of financial assets

Options on purchase or sale of financial assets are carried at their fair value. These options are accounted for as assets when their fair value is positive (for call options) and as liabilities when the fair value is negative (for put options). Changes in the fair value of these options instruments are included in the consolidated statement of income.

5.5 Cash and cash equivalents and restricted cash

Cash comprises cash on hand and balances with banks. Cash equivalents comprise short-term investments which are readily converted to cash and have an original maturity of three months or less. Restricted cash balances comprise balances of cash and cash equivalents which are restricted as to withdrawal under the terms of certain borrowings or under banking regulations. Restricted cash balances are excluded from cash and cash equivalents in the consolidated statement of cash flows.

5.6 Value added tax (VAT)

Output VAT related to sales is payable to tax authorities on the earlier of (a) collection of the receivables from customers or (b) delivery of the goods or services to customers. Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases is recognised in the consolidated balance sheet on a gross basis and disclosed separately as a current asset and liability, except for VAT, presented within other non-current assets. VAT, presented within other non-current assets relates to assets under construction, which is expected to be recovered in more than 12 months after the balance sheet date. Where provision has been made for impairment of receivables, impairment loss is recorded for the gross amount of the debtor, including VAT.

5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

5.7 inventories

Inventories are valued at the lower of net realisable value and cost. Cost of inventory is determined on the weighted average basis. The cost of finished goods and work in progress comprises raw material, direct labour, other direct costs and related production overhead but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less selling expenses and completion costs. 

5.8 Property, plant and equipment

Property, plant and equipment are carried at historical cost of acquisition or construction after deduction of accumulated depreciation and accumulated impairment. 

Gas  and  oil  exploration  and  production  activities  are  accounted  for  in accordance  with   the   successful  efforts method. Under the successful efforts method, costs of development and successful exploratory wells are capitalised.

Costs of unsuccessful exploratory wells are expensed upon determination that the well does not justify commercial development. Other exploration costs are expensed as incurred. Exploration costs are classified as research and development expenses within operating expenses.

Major renewals and improvements are capitalised. Maintenance, repairs and minor renewals are expensed as incurred. Minor renewals include all expenditures that do not result in a technical enhancement of the asset beyond its original capability. Gains and losses arising from the disposal of property, plant and equipment are included in the consolidated statement of income as incurred.

Property, plant and equipment includes the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located.

Interest costs on borrowings are capitalised as part of the cost of assets under construction during the period of time that is required to construct and prepare the asset for its intended use.

The return to a governmental authority of state social assets (such as rest houses, housing, schools and medical facilities) retained by the Group at privatisation is recorded only upon the termination of operating responsibility for the social assets. The Group does not possess ownership rights for the assets, but records them on its balance sheet up to the return to a governmental authority because the Group controls the benefits which are expected to flow from the use of the assets and bears all associated operational and custody risks. These disposals are considered to be shareholder transactions because they represent a return of assets for the benefit of governmental authorities, as contemplated in the original privatisation arrangements. Consequently, such disposals are accounted for as a reduction directly in equity.

Depletion of acquired production licenses is calculated using the units-of-production method for each field based upon proved reserves. Oil and gas reserves for this purpose are determined in accordance with the guidelines of the Society of Petroleum Engineers and the World Petroleum Congress, and were estimated by independent reservoir engineers. 

Depreciation of assets (other than acquired production licenses) is calculated using the straight-line method over their estimated remaining useful lives, as follows:

	Years
Pipelines	33
Wells	20-40
Machinery and equipment	10-18
Buildings	30-40
Roads	20-40
Social assets	10-40

Depreciation on wells has been calculated on cost, using the straight line method rather than, as is the more generally accepted international industry practice, on the unit-of-production method. The difference between straight line and units-of-production is not material for these consolidated financial statements. Assets under construction are not depreciated until they are placed in service.

5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

5.9 Impairment of non-current non-financial assets

At each balance sheet date, management assesses whether there is any indication that the recoverable value of the Group's assets has declined below the carrying value. When such a decline is identified, the carrying amount is reduced to the estimated recoverable amount which is the higher of fair value less costs to sell and value in use. Individual assets are grouped for impairment assessment purposes into the cash-generating units at the lowest level at which there are identifiable cash inflows that are largely independent of the cash inflows of other groups of assets.

Goodwill acquired in a business combination is assessed for the recoverability of its carrying value annually irrespective of whether there is any indication of impairment exists at the balance sheet date. Goodwill acquired through business combinations is allocated to cash-generating unit (or groups of cash-generating units) that is expected to benefit from the synergies of the acquisition. In assessing whether goodwill has been impaired, the carrying amount of the cash-generating unit (including goodwill) is compared with the recoverable amount of the respective cash-generating unit (see Note 35). 

The amount of the reduction of the carrying amount of the cash-generating unit to the recoverable value is recorded in the consolidated statement of income in the period in which the reduction is identified. Impairments, except those relating to goodwill, are reversed as applicable to the extent that the events or circumstances that triggered the original impairment have changed. Impairment losses recognized for goodwill are not reversed in subsequent reporting periods.

5.10 Borrowings

Borrowings are recognised initially at their fair value which is determined using the prevailing market rate of interest for a similar instrument, if significantly different from the transaction price, net of transaction costs incurred. In subsequent periods, borrowings are recognised at amortised cost, using the effective interest method; any difference between fair value of the proceeds (net of transaction costs) and the redemption amount is recognised as interest expense over the period of the borrowings.

5.11 Deferred tax

Deferred tax assets and liabilities are calculated in respect of temporary differences using the balance sheet liability method. Deferred tax assets and liabilities are recorded for all temporary differences arising between the tax basis of assets and liabilities and their carrying values for financial reporting purposes. A deferred tax asset is recorded only to the extent that it is probable that taxable profit will be available against which the deferred tax asset will be realised or if it can be offset against existing deferred tax liabilities. Deferred tax assets and liabilities are measured at tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates that have been enacted or substantively enacted at the balance sheet date.

Deferred income tax is provided on all temporary differences arising on investments in subsidiaries, associated undertakings and joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. 

5.12 Foreign currency transactions

Monetary assets and liabilities denominated in foreign currencies are translated into Russian Roubles at the official exchange rates prevailing at the reporting date. Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transactions. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at the reporting date are recognised as exchange gains or losses in the consolidated statement of income. 

The balance sheets of foreign subsidiaries, associated undertakings and jointly controlled entities are translated into Roubles at the official exchange rate prevailing at the reporting date. Statements of income of foreign entities are translated at average exchange rates for the year. Exchange differences arising on the translation of the net assets of foreign subsidiaries and associated undertakings are recognised as translation differences and recorded directly in equity. 

The official US dollar to RR exchange rates, as determined by the Central Bank of the Russian Federation, were 29.38 and 24.55 as of 31 December 2008 and 2007, respectively. The official Euro to RR exchange rates, as determined by the Central Bank of the Russian Federation, were 41.44 and 35.93 as of 31 December 2008 and 2007, respectively.

5 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Exchange restrictions and currency controls exist relating to converting the RR into other currencies. The RR is not freely convertible in most countries outside of the Russian Federation.

5.13 Provisions for liabilities and charges

Provisions, including provisions for pensions, environmental liabilities and asset retirement obligations, are recognised when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. As obligations are determined, they are recognised immediately based on the present value of the expected future cash outflows arising from the obligations. Initial estimates (and subsequent revisions to the estimates) of the cost of dismantling and removing the property, plant and equipment are capitalized as property, plant and equipment.

5.14 Equity

Treasury shares

When the Group companies purchase the equity share capital of OAO Gazprom, the consideration paid including any attributable transaction costs is deducted from total equity as treasury shares until they are re-sold. When such shares are subsequently sold, any consideration received net of income taxes is included in equity. Treasury shares are recorded at weighted average cost. The gains (losses) arising from treasury share transactions are recognised as a movement in the consolidated statement of changes in equity, net of associated costs including taxation.

A contract that contains an obligation for an entity to purchase its own equity instruments for cash or another financial asset gives rise to a financial liability for the present value of the redemption amount. When the financial liability is recognised initially its fair value is reclassified from equity. The premium received for a written option is added directly to equity.

Dividends

Dividends are recognised as a liability and deducted from equity when they are recommended by the Board of Directors and approved at the General Meeting of Shareholders. 

5.15 Revenue recognition

Revenues are measured at the fair value of the consideration received or receivable. When the fair value of consideration received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up. 

Sales are recognised for financial reporting purposes when products are delivered to customers and title passes and are stated net of VAT, excise taxes and other similar compulsory payments. Gas transportation sales are recognized when transportation services have been provided, as evidenced by delivery of gas in accordance with the contract.

Natural gas prices and gas transportation tariffs to the final consumers in the Russian Federation are established mainly by the Federal Tariffs Service. Export gas prices for sales to European countries are indexed to oil products prices, as stipulated in long-term contracts. Export gas prices for sales to Former Soviet Union countries are determined in accordance with formulas, similar to European countries and in some cases are fixed.

Mutual cancellation and other non-cash transactions 

Certain accounts receivable arising from sales are settled either through non-cash transactions (mutual cancellations), or other non-cash settlements. The non-cash settlements are constantly decreasing. Non-cash settlements include promissory notes which are negotiable debt obligations. A portion of operations, including capital expenditures, is also transacted by mutual cancellations or other non-cash settlements.

Sales and purchases that are expected to be settled by mutual settlements, barter or other non-cash settlements are recognised based on fair value of consideration to be received or given up in non-cash settlements. The fair value is determined with reference to observable market information.

Non-cash transactions have been excluded from the consolidated cash flow statement. Investing and financing activities and the total of operating activities represent actual cash flows.

  5  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Promissory notes

Promissory notes issued by the Group are recorded initially at the fair value of the consideration received or the fair value of the note, which is determined using the prevailing market rate of interest for a similar instrument.

In subsequent periods, promissory notes are stated at amortised cost using the effective yield method. Any difference between the fair value of the consideration (net of transaction costs) and the redemption amount is recognised as interest expense over the period of the promissory note. 

5.16 Interest

Interest income and expense are recognised in the consolidated statement of income for all interest bearing financial instruments on an accrual basis using the effective yield method. Interest income includes nominal interest and accrued discount and premium. When loans become doubtful of collection, they are written down to their recoverable amounts (using the original effective rate) and interest income is thereafter recognised based on the same effective rate of interest.

5.17 Research and development

Research expenditure is recognised as an expense as incurred. Development expenditure is recognised as intangible assets (within other non-current assets) to the extent that such expenditure is expected to generate future economic benefits. Other development expenditures are recognised as an expense as incurred. However, development costs previously recognised as an expense are not recognised as an asset in a subsequent period, even if the asset recognition criteria are subsequently met.

5.18 Employee benefits

Pension and other post-retirement benefits

The Group operates a defined benefit plan, concerning the majority employees of the Group. Pension costs are recognised using the projected unit credit method. The cost of providing pensions is charged to staff expense within operating expenses in the consolidated statement of income so as to spread the regular cost over the service lives of employees. The pension obligation is measured at the present value of the estimated future cash outflows using interest rates of government securities, which have the terms to maturity approximating the terms of the related liability. Actuarial gains and losses on assets and liabilities are recognised over the average remaining service lives of employees, if gains and losses fall outside a "corridor" of plus or minus 10% of unrecognized gains or losses (see Note 23).

Plan assets are measured at fair value and are subject to certain limitations (see Note 23). Fair value of plan assets is based on market prices. When no market price is available the fair value of plan assets is estimated by different valuation techniques, including discounted expected future cash flow using a discount rate that reflects both the risk associated with the plan assets and maturity or expected disposal date of these assets.

In the normal course of business the Group contributes to the Russian Federation State pension plan on behalf of its employees. Mandatory contributions to the State pension plan, which is a defined contribution plan, are expensed when incurred and are included within staff costs in operating expenses. The cost of providing other discretionary post-retirement obligations (including constructive obligations) is charged to the consolidated statement of income so as to spread the regular cost over the service lives of employees. 

Social expenses

The Group incurs employee costs related to the provision of benefits such as health and social infrastructure and services. These amounts principally represent an implicit cost of employing production workers and, accordingly, are charged to operating expenses in the consolidated statement of income.

5.19 Financial instruments

Financial instruments carried on the consolidated balance sheet include cash and cash equivalent balances, financial assets, receivables, promissory notes, accounts payable and borrowings. The particular recognition and measurement methods adopted are disclosed in the individual policy statements associated with each item.

5    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Accounting for financial guarantee contracts

Financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument. Financial guarantee contracts are initially recognised at fair value and are subsequently measured at the higher of (i) the remaining unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the obligation at the balance sheet date.

Fair value disclosure

The fair value of accounts receivable for disclosure purposes is measured by discounting the value of expected cash flows at the market rate of interest for similar borrower at the reporting date. 

The fair value of financial liabilities and other financial instruments (except if publicly quoted) for disclosure purposes is measured by discounting the future contractual cash flows at the current market interest rate available to the Group for similar financial instruments.

The fair value of publicly quoted financial instruments for disclosure purposes are measured based on current market value at the close of business on the reporting date.

5.20 Recent accounting pronouncements

In 2008 the Group has adopted all IFRS, amendments and interpretations which are effective 1 January 2008 and which are relevant to its operations, except for IFRIC 14 "IAS 19-The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction" which was adopted early by the Group in 2007. 

(a) Standards or Interpretations effective in 2008

Effective 1 January 2008, the Group adopted IFRIC 12 "Service Concession Arrangements" ("IFRIC 12"), which is effective for annual periods beginning on or after 1 January 2008. Service concessions are arrangements whereby a government or other public sector entity grants contracts for the supply of public services - such as roads, airports and other facilities - to private sector operators. The interpretation addresses how service concession operators should apply existing IFRSs to account for the obligations they undertake and rights they receive in service concession arrangements. The application of IFRIC 12 did not materially affect the Group's consolidated financial statements.

Amendment to IAS 39 "Financial instruments: Recognition and measurement", which is effective from 1 July 2008. The amendment allows the reclassification of certain financial assets previously classified as "held for trading" or "available for sale" to another category under limited circumstances. Various disclosures are required where a reclassification has been made. Derivatives and assets designated as "at fair value through profit or loss" under the fair value option are not eligible for this reclassification. Reclassification cannot be applied retrospectively before 1 July 2008. The application of this interpretation did not affect the Group's consolidated financial statements.

All changes in the accounting policies have been made in accordance with IAS 8 "Accounting policies, changes in accounting estimates and errors" which requires retrospective application unless the new standard requires otherwise. All standards adopted by the Group require retrospective application.

(b) Standards, Amendments and Interpretations to existing Standards that are not yet effective and have not been early adopted by the Group 

 IFRS 8 "Operating Segments" ("IFRS 8"), which is effective for annual periods beginning on or after 1 January 2009. The standard replaces IAS 14 "Segment reporting" ("IAS 14"). The standard requires an entity to adopt the "management approach" to reporting of performance of its operating segments. Generally, the information to be reported would be what management uses internally for evaluating segment performance and deciding how to allocate resources to operating segments. Such information may be different from what is used to prepare the statement of income and balance sheet. The IFRS therefore requires explanations of the basis on which the segment information is prepared and reconciliations to the amounts recognized in the statement of income and balance sheet. The Group is currently assessing the impact of the application of IFRS 8 on its consolidated financial statements.

Amendment to IAS 23 "Borrowing costs" ("IAS 23"), which is effective for annual periods beginning on or after 1 January 2009. The amendment to IAS 23 removes the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. The application of these amendments is not expected to materially affect the Group's consolidated financial statements.

5  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

IFRIC 13 "Customer Loyalty Programmes" ("IFRIC 13"), which is effective for annual periods beginning on or after 1 July 2008. IFRIC 13 clarifies that where goods and services are sold with a customer loyalty incentive, the arrangement is a multi-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair value. The application of IFRIC 13 is not expected to materially affect the Group's consolidated financial statements. 

Amendment to IAS 1 "Presentation of Financial Statements" ("IAS 1"), which is effective for annual periods beginning on or after 1 January 2009. The main change in IAS 1 is the replacement of the statement of income by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Group will apply the amendment from 1 January 2009.

Amendment to IAS 32 and IAS 1 ("Puttable financial instruments and obligations arising on liquidation"), which is effective from 1 January 2009. The amendment requires classification of puttable financial instruments and instruments that impose an obligation to deliver a pro rata share of the net asset on liquidation as equity. Management does not expect the amendment to materially affect the Group's consolidated financial statements.

Amendment to IAS 27 "Consolidated and Separate Financial Statements" ("IAS 27"), which is effective for annual periods beginning on or after 1 July 2009. The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the non-controlling interests (previously "minority interests") even if these results in the non-controlling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent's ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control over a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Group will prospectively apply the amendment from 1 January 2010.

Amendment to IFRS 3 "Business Combinations" ("IFRS 3"), which is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. The revised IFRS 3 will allow entities to choose to measure non-controlling interests using the existing IFRS 3 method (proportionate share of the acquiree's identifiable net assets) or at fair value. Measurement of the non-controlling interests at fair value will have corresponding effect on consolidated goodwill (goodwill attributable to non-controlling interest will be recognized). The revised IFRS 3 is more detailed in providing guidance on the application of the acquisition method to business combinations. The requirement to measure at fair value every asset and liability at each step in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, goodwill will be measured as the difference at acquisition date between the fair value of any investment in the business held before the acquisition, the consideration transferred, the amount recognised for the non-controlling interest and the fair value of the net assets acquired. Acquisition-related costs will be accounted for separately from the business combination and therefore recognized as expenses rather than included in goodwill. An acquirer will have to recognize at the acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability after the acquisition date will be recognized in accordance with other applicable IFRSs, as appropriate, rather than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only mutual entities and business combinations achieved by contract alone. The Group will apply the new provisions of this standard prospectively to any business combination on or after 1 January 2010.

Amendment to IFRS 2 "Share-based Payment" ("Vesting Conditions and Cancellations"), which is effective for annual periods beginning on or after 1 January 2009. The amendment clarifies that only service conditions and performance conditions are vesting conditions. Other features of a share-based payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The application of the amended standard is not expected to materially affect the consolidated financial statements.

Improvements to International Financial Reporting Standards (issued in April 2009). Amendments to IFRS 2, IAS 38, IFRIC 9 and IFRIC 16 are effective for annual periods beginning on or after 1 July 2009; amendments to IFRS 5, IFRS 8, IAS 1, IAS 7, IAS 17, IAS 36 and IAS 39 are effective for annual periods beginning on or after 1 January 2010; the improvements have not yet been adopted by the EU. The improvements consist of a mixture of substantive changes and clarifications in the following standards and 

5  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

interpretations: clarification that contributions of businesses in common control transactions and formation of joint ventures are not within the scope of IFRS 2; clarification of disclosure requirements set by IFRS 5 and other standards for non-current assets (or disposal groups) classified as held for sale or discontinued operations; amending disclosure requirements for a measure of segment assets under IFRS 8; amending IAS 1 regarding non-current/current classification of liabilities settled by equity instruments; clarifying in IAS 7 that only expenditures that result in a recognised asset are eligible for classification as investing activities; clarifying the considerations for classification land leases and setting transition requirements for reclassification of unexpired leases in IAS 17; providing additional guidance in IAS 18 for determining whether an entity acts as a principal or an agent; clarification in IAS 36 that a cash generating unit shall not be larger than an operating segment before aggregation; supplementing IAS 38 regarding measurement of fair value of intangible assets acquired in a business combination, providing additional guidance on techniques used in the absence of active market; supplementing IAS 39 to exclude from its scope certain forward contracts resulting in business combinations, to clarify the period of reclassifying gains or losses on the hedged instruments from equity to profit or loss and to provide guidance for circumstances when prepayment options are closely related to the host contract; clarification that embedded derivatives in contracts acquired in common control transactions and formation of joint ventures are not within the scope of IFRIC 9; and removal of the restriction in IFRIC 16 that hedging instruments may not be held by the foreign operation that itself is being hedged. The Group does not expect the amendments to have any material effect on its consolidated financial statements.

Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the International Accounting Standards Board decided to initiate an annual improvements project as a method of making necessary, but non-urgent, amendments to IFRS. The amendments issued in May 2008 consist of a mixture of substantive changes, clarifications, and changes in terminology in various standards. The substantive changes relate to the following areas: classification as assets held for sale under IFRS 5 in case of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading as non-current under IAS 1; accounting for sale of assets which were previously held for rental under IAS 16 and classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of definition of a curtailment under IAS 19; accounting for below market interest rate government loans in accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending the definition of the fair value through profit or loss category to be consistent with hedge accounting under IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40; and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Management does not expect the amendments to have any material effect on the Group's consolidated financial statements. 

Amendment to IFRS 1 and IAS 27 ("Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate"), which is effective for annual periods beginning on or after 1 January 2009. The amendment allows first-time adopters of IFRS to measure investments in subsidiaries, jointly controlled entities or associates at fair value or at previous GAAP carrying value as deemed cost in the separate financial statements. The amendment also requires distributions from pre-acquisition net assets of investees to be recognized in profit or loss rather than as a recovery of the investment. The amendment will not have a material impact on the Group's consolidated financial statements.

Amendment to IAS 39 "Financial instruments: recognition and measurement" ("IAS 39"), which is effective for annual periods beginning on or after 1 July 2009. The amendment to IAS 39 clarifies how the principles that determine whether a hedged risk or portion of cash flows is eligible for designation should be applied in particular situations. The application of this amendment is not expected to materially affect the Group's consolidated financial statements.

IFRIC 15 "Agreements for the Construction of Real Estate" ("IFRIC 15"), which is effective for annual periods beginning on or after 1 January 2009. IFRIC 15 addresses diversity in accounting for real estate sales as some entities recognise revenue in accordance with IAS 18 "Revenue" (when the risks and rewards in the real estate are transferred) and others recognise revenue as the real estate is developed in accordance with IAS 11 "Construction Contracts". The interpretation clarifies which standard (IAS 18 or IAS 11) should be applied to particular transactions and is likely to mean that IAS 18 will be applied to a wider range of transactions. Entities that have previously recognised revenue from residential real estate sales under IAS 11 will be the most significantly affected and will probably be required to apply IAS 18. 

5  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The application of this interpretation is not expected to materially affect the Group's consolidated financial statements.

IFRIC 16 "Hedges of a Net Investment in a Foreign Operation" ("IFRIC 16") which is effective for annual periods beginning on or after 1 October 2008. This interpretation relates to the criteria required to apply hedge accounting in hedge of a net investment in a foreign operation in accordance with IAS 39. The application of this interpretation is not expected to materially affect the Group's consolidated financial statements.

IFRIC 17 "Distributions of Non-cash assets to owners" ("IFRIC 17") which is effective for annual periods beginning on or after 1 July 2009. The interpretation provides guidance on accounting of distribution of assets other than cash (non-cash assets) as dividends to its owners acting in their capacity as owners. It also clarifies the situations, when entity gives its owners a choice of receiving either non-cash assets or a cash alternative. The Group will apply the interpretation starting from 1 January 2010. 

IFRIC 18 "Transfers of Assets from customers" ("IFRIC 18") which is effective for annual periods beginning on or after 1 July 2009. The interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. The application of this interpretation is not expected to materially affect the Group's consolidated financial statements.

IFRS 7 "Financial Instruments: Disclosures" ("IFRS 7") which is effective for annual periods beginning on or after 1 January 2009. The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The entity will be required to disclose an analysis of financial instruments using a three-level fair value measurement hierarchy. The amendment clarifies that the maturity analysis of liabilities should include issued financial guarantee contracts at the maximum amount of the guarantee in the earliest period in which the guarantee could be called; and requires disclosure of remaining contractual maturities of financial derivatives if the contractual maturities are essential for an understanding of the timing of the cash flows. An entity will further have to disclose a maturity analysis of financial assets it holds for managing liquidity risk, if that information is necessary to enable users of its financial statements to evaluate the nature and extent of liquidity risk. The Group is currently assessing the impact of the amended standard on its consolidated financial statements.

Amendments to IFRIC 9 and IAS 39 "Embedded Derivatives" which is effective for annual periods ending on or after 30 June 2009. The amendments clarify that on reclassification of a financial asset out of the 'at fair value through profit or loss' category, all embedded derivatives have to be assessed and, if necessary, separately accounted for. 

 

6. CRITICAL JUDGMENTS AND ESTIMATES IN APPLYING ACCOUNTING POLICIES

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities as well as disclosures. Management also makes certain judgments, apart from those involving estimations, in the process of applying the accounting policies. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from our estimates, and our estimates can be revised in the future, either negatively or positively, depending upon the outcome or changes in expectations based on the facts surrounding each estimate.

Judgments that have the most significant effect on the amounts recognized in the financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year are reported below.

6. 1 Consolidation of subsidiaries

Management judgment is involved in the assessment of control and the consolidation of certain affiliated entities in the Group's consolidated financial statements. Following the change in the Board composition of OAO Gazprombank, the Group determined that it ceased to have the ability to control the financial and operating policies of OAO Gazprombank and its subsidiaries including Sibur-Holding and Gazprom-Media (see Note 4). Management judgement was also required with respect to the deconsolidation of NPF Gazfund in 2007. 

6 Critical JUDGMENTS AND Estimates in Applying Accounting Policies (continued) 

6.2 Tax legislation and uncertain tax position

Russian tax, currency and customs legislation is subject to varying interpretations (see Note 38).

The Group's uncertain tax positions (potential tax gains and losses) are reassessed by management at every balance sheet date. Liabilities are recorded for income tax positions that are determined by management based on the interpretation of current tax laws. Liabilities for penalties, interest and taxes other than on income are recognised based on management's best estimate of the expenditure required to settle tax obligations at the balance sheet date.

6.3 Assumptions to determine amount of provisions

Impairment provision for accounts receivable

The impairment provision for accounts receivable is based on the Group's assessment of the collectability and recoverable amount of specific customer accounts, being the present value of expected cash flows. If there is deterioration in a major customer's creditworthiness or actual defaults are higher or lower than the estimates, the actual results could differ from these estimates. The charges (and releases) for impairment of accounts receivable may be material (see Note 10 and 35).

Impairment of available-for-sale financial assets

The determination under IAS 39 whether an available-for-sale financial asset is impaired requires significant judgment. In making this judgement, the Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost; and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow. Management applies judgment on a case by case basis to determine whether a decline in fair value of an available-for-sale financial asset below its cost is significant or prolonged. Impairment charges are given in Note 15.

Impairment of other assets

The estimation of forecast cash flows involves the application of a number of significant judgements and estimates to certain variables including volumes of production and extraction, prices on gas, oil, oil products and electrical power, operating costs, capital investment, hydrocarbon reserves estimates, and macroeconomic factors such as inflation and discount rates. In addtition, judgement is applied in determining the cash generating units assessed for impairment.

The value in use of assets or cash-generating units related to oil and gas operations are based on the cash flows expected from oil and gas production volumes, which include both proved reserves as well as certain volumes of those that are expected to constitute proved and probable reserves in the future. Impairment charges are given in Notes 12 and 35.

Accounting for provisions

Accounting for impairment includes provisions against capital construction projects, financial assets, other non-current assets and inventory obsolescence. Because of the Group's operating cycle, certain significant decisions about capital construction projects are made after the end of the calendar year. Accordingly, the Group typically has larger impairment charges or releases in the fourth quarter of the fiscal year as compared to other quarters.

6.4 Site restoration and environmental costs

Site restoration costs that may be incurred by the Group at the end of the operating life of certain of the Group's facilities and properties are recognized when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. The cost is depreciated through the consolidated statement of income on a straight-line basis over the asset's productive life. Changes in the measurement of an existing site restoration obligation that result from changes in the estimated timing or amount of the outflows, or from changes in the discount rate adjust the cost of the related asset in the current period. IFRS prescribes the recording of liabilities for these costs. Estimating the amounts and timing of those obligations that should be recorded requires significant judgment. This judgment is based on cost and engineering studies using currently available technology and is based on current environmental regulations. Liabilities for site restoration are subject to change because of change in laws and regulations, and their interpretation. 

6 Critical JUDGMENTS AND Estimates in Applying Accounting Policies (continued) 

6.5 Useful lives of property, plant and equipment

The estimation of the useful life of an item of property, plant and equipment is a matter of management judgment based upon experience with similar assets. In determining the useful life of an asset, management considers the expected usage based on production and reserve estimates, estimated technical obsolescence, physical wear and tear and the physical environment in which the asset is operated. Changes in any of these conditions or estimates may result in adjustments to future depreciation rates.

Based on the terms included in the licenses and past experience, management believes hydrocarbon production licenses will be extended past their current expiration dates at insignificant additional costs. Because of the anticipated license extensions, the assets are depreciated over their useful lives beyond the end of the current license term.

6.6 Fair value estimation for financial instruments

The fair value of financial assets and liabilities, other than financial instruments that are traded in an active market, is determined by applying valuation techniques. Discounted cash flow analysis is used for loans and receivables as well as debt instruments that are not traded in active markets. Management uses its judgment to make assumptions based on market conditions existing at each balance sheet date (see Note 5).

6.7 Fair value estimation for acquisitions

In accordance with IFRS 3, the Group recognizes the assets and liabilities acquired in a business combination based upon their fair values. In cases where market values are available such values are utilized in the measurement of acquired assets and liabilities. When market values are not available, fair value determination includes discounted cash flow models based upon management's assumptions and estimates regarding future cash flows, or replacement costs models (see Note 33). The determination of fair value of assets acquired and liabilities assumed requires management to make judgments with respect to the valuation model applied, the amount an timing of cash flows forecasts or other assumptions such as discount rates.

6.8 Accounting for plan assets and pension liabilities

Pension plan liabilities are estimated using actuarial techniques and assumptions as disclosed in Note 23. Actual results may differ from the estimates, and the Group's estimates can be revised in the future based on changes on economic and financial conditions. 

In addition, certain plan assets included in NPF Gazfund are estimated using the fair value estimation techniques. Management makes judgments with respect to the selection of valuation model applied, the amount and timing of cash flows forecasts or other assumptions such as discount rates. The recognition of plan assets is limited by the estimated present value of future benefits, available to the Group in relation to this plan. These benefits are determined using actuarial techniques and assumptions. The impact of the change in the limitation of the plan assets in accordance with IAS 19 is disclosed in Note 23. The value of plan assets and the limit are subject to revision in the future. 

7. SEGMENT INFORMATION

The Group operates as a vertically integrated business with substantially all external gas sales generated by the gas distribution business. Following the practice suggested by IAS 14, "Segment Reporting" ("IAS 14") for vertically integrated businesses the following business segments are identified within the Group:

Production of gas - exploration and production of gas;

Transport - transportation of gas;

Distribution - domestic and export sale of gas;

Production of crude oil and gas condensate - exploration of oil and gas condensate, sales of crude oil and gas condensate;

Refining - processing of oil, gas condensate and other hydrocarbons, and sales of refined products; and

Other - other activities, including electric and heat energy generation and sales, construction and gas storage.

7 SEGMENT INFORMATION (continued)

These segments are reflected by the Group's organizational structure and the Group's internal financial reporting system.

	Production of gas	Transport	Distribution		Production of crude oil and gas condensate		Refining		Other		Total
31 December 2008
Segment assets	1,278,654	1,874,130		691,143		669,016		268,514		1,194,308		5,975,765
Associated undertakings and jointly controlled entities	81,865	71,860		73,375		450,774		51,996		42,273		772,143
Unallocated assets												724,913
Inter-segment eliminations												(304,253)
Total assets												7,168,568
Segment liabilities	130,639	169,169		239,984		114,826		83,823		191,184		929,625
Unallocated liabilities												1,630,097
Inter-segment eliminations												(304,253)
Total liabilities												2,255,469
Capital additions	224,176	248,114		34,819		79,489		50,554		76,971		714,123
Depreciation	44,890	83,382		1,309		32,823		16,621		15,991		195,016
Charge for impairment  provisions and other  provisions	5,452	11,498		34,156		741		3,061		54,185		109,093
Unallocated impairment  provisions and other  provisions												6,249
Total impairment provisions and other provisions												115,342
	Production of gas	Transport		Distribution		Production of crude oil and gas condensate		Refining		Other		Total
31 December 2007
Segment assets	1,096,544	1,685,608		482,247		704,395		333,051		1,222,032		5,523,877
Associated undertakings and jointly controlled entities	74,664	32,258		51,178		457,972		33,346		20,985		670,403
Unallocated assets												849,638
Inter-segment eliminations												(251,362)
Total assets												6,792,556
Segment liabilities	102,058	150,933		178,399		90,399		89,601		283,446		894,836
Unallocated liabilities												1,835,985
Inter-segment eliminations												(251,362)
Total liabilities												2,479,459
Capital additions	187,486	193,664		31,324		62,427		39,195		54,306		568,402
Depreciation	43,404	83,238		303		33,426		14,379		8,827		183,577
Charge for impairment provisions and other  provisions	8,789	20,497		1,462		1,824		3,811		6,029		42,412
Unallocated impairment provisions and other  provisions												1,526
Total impairment provisions and other provisions												43,938

Segment assets consist primarily of property, plant and equipment and current assets. Unallocated assets include VAT recoverable, cash and cash equivalents, restricted cash and other non-current assets. 

7 SEGMENT INFORMATION (continued)

Segment liabilities comprise operating liabilities, excluding items such as taxes payable, and provisions for liabilities and charges.

Charges for impairment provisions and other provisions above include impairment provisions for accounts receivable, assets under construction, inventory and other non-current assets and provisions for liabilities and charges.

	Production of gas	Transport	Distribution	Production of crude oil and gas condensate	Refining	Other	Total
Year ended  31 December 2008
Segment revenues
Inter-segment sales	290,847	561,050	118,021	178,280	8,462	20,994	1,177,654
External sales	11,678	70,685	2,254,723	214,955	652,956	313,963	3,518,960
Total segment revenues	302,525	631,735	2,372,744	393,235	661,418	334,957	4,696,614
Segment expenses
Inter-segment expenses	(6,427)	(71,352)	(853,380)	-	(196,291)	(50,204)	(1,177,654)
External expenses	(254,157)	(413,645)	(660,261)	(290,861)	(316,179)	(317,061)	(2,252,164)
Total segment expenses	(260,584)	(484,997)	(1,513,641)	(290,861)	(512,470)	(367,265)	(3,429,818)
Segment result	41,941	146,738	859,103	102,374	148,948	(32,308)	1,266,796
Unallocated operating   expenses							(6,490)
Operating profit							1,260,306
Share of net income (loss) of   associated undertakings  and jointly controlled  entities	5,503	(4,506)	42,007	(19,944)	2,567	(42,313)	(16,686)
	Production of gas	Transport	Distribution	Production of crude oil and gas condensate	Refining	Other	Total
Year ended  31 December 2007
Segment revenues
Inter-segment sales	245,206	493,517	64,560	95,418	6,242	17,027	921,970
External sales	5,623	41,740	1,522,080	167,758	525,216	160,828	2,423,245
Total segment revenues	250,829	535,257	1,586,640	263,176	531,458	177,855	3,345,215
Segment expenses
Inter-segment expenses	(5,129)	(51,669)	(739,410)	-	(110,013)	(15,749)	(921,970)
External expenses	(225,579)	(337,159)	(471,227)	(174,729)	(330,530)	(146,474)	(1,685,698)
Total segment expenses	(230,708)	(388,828)	(1,210,637)	(174,729)	(440,543)	(162,223)	(2,607,668)
Segment result	20,121	146,429	376,003	88,447	90,915	15,632	737,547
Unallocated operating expenses							(35,769)
Operating profit							701,778
Share of net income of    associated undertakings  and jointly controlled  entities	4,409	2,654	5,461	4,299	6,795	616	24,234

7 SEGMENT INFORMATION (continued)

The inter-segment sales mainly consist of: 

Production of gas	sale of gas to the Distribution and Refining segments;
Transport	rendering transportation services to the Distribution segment;
Distribution	sale of gas to the Transport segment for own needs and to the Other segment for electric and heat energy generation;
Production of crude  oil and gas condensate	sale of oil and gas condensate to the Refining segment for further processing; and
Refining	sale of refined hydrocarbon products to other segments;
Other	sales of gas storage to the Distribution segment.

Internal transfer prices, mostly for Production of gas and Transport segments, are established by the management of the Group with the objective of providing specific funding requirements of the individual subsidiaries within each segment. Prices are determined on a cost plus basis. 

Included within unallocated operating expenses are corporate expenses, including provision for the impairment of certain financial assets.

Substantially all of the Group's operating assets are located in the Russian Federation. Sales by geographical regions are disclosed in Note 25. 

 

8. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH

Balances included within cash and cash equivalents in the consolidated balance sheet represent cash on hand and balances with banks. Restricted cash balances include cash and cash equivalents restricted as to withdrawal under the terms of certain borrowings. In addition, restricted cash comprises cash balances of RR 162 and RR 9,051 as of 31 December 2008 and 2007, respectively, in subsidiary banks, which are restricted as to withdrawal under banking regulations.

The table below analyses credit quality of banks at which the Group holds cash and cash equivalents by external credit ratings, published by Standard and Poor's and other credit agencies. The table below uses Standard and Poor's rating classification:

	31 December
	2008	2007
Cash on hand	4,949	13,218
External credit rating of BB and above	301,849	206,416
External credit rating of B	16,308	46,299
No external credit rating	20,727	13,176
Total cash and cash equivalents	343,833	279,109

Sovereign credit rating of the Russian Federation published by Standard and Poor's is BBB.

9. SHORT-TERM FINANCIAL ASSETS

		31 December
Notes		2008	2007
	Financial assets held for trading:
39	Corporate bonds	1,206	57,203
	Corporate shares	2,017	13,618
	Government and municipal bonds	1,109	13,343
	Promissory notes	7,874	12,145
		12,206	96,309
	Available-for-sale financial assets:
39	Bonds	4,300	1,730
	Promissory notes (net of impairment provision of RR 779 and   RR 3,171 as of 31 December 2008 and 2007, respectively)	6,942	15,872
		11,242	17,602
	Total short-term financial assets	23,448	113,911

Financial assets held for trading owned by the Group's banking subsidiaries amounted to RR 8,989 and RR 88,933 as of 31 December 2008 and 31 December 2007, respectively. These assets primarily comprise marketable equity and debt securities intended to generate short-term profits through trading. 

The assets held for trading as of 31 December 2007 mainly included financial assets of OAO Gazprombank. The bank was deconsolidated in June 2008 (see Note 34).

Information about credit quality of short-term financial assets is presented in the table below with reference to external credit ratings of related counterparties or instruments (published by Standard and Poor's and other rating agencies). The table below uses Standard and Poor's rating classification: 

	31 December
	2008	2007
External credit rating of BB and above	12,543	65,480
External credit rating of B	1,947	7,922
No external credit rating	6,941	26,891
Total short-term financial assets	21,431	100,293

Short-term financial assets with no external credit rating are mainly represented by investments in debt securities quoted on the Russian security market and securities, which are not quoted.

 

10. ACCOUNTS RECEIVABLE AND PREPAYMENTS 

		31 December
		2008	2007
	Financial assets
	Trade receivables (net of impairment provision of RR 96,599 and RR 70,820 as of 31 December 2008 and 2007, respectively)	393,996	307,311
	Other receivables (net of impairment provision of RR 16,426 and RR 19,669 as of 31 December 2008 and 2007, respectively)	113,300	270,044
		507,296	577,355
	Non-financial assets
	Prepayments and advances (net of impairment provision of RR 1,150 and RR 559 as of 31 December 2008 and 2007, respectively)	168,638	120,109
	Total accounts receivable and prepayments	675,934	697,464

The estimated fair value of short-term accounts receivable approximates their carrying value.

As of 31 December 2008 and 2007 RR 318,757 and RR 211,416 of trade receivables, net of impairment provision, respectively, are denominated in foreign currencies, mainly US dollar and Euro.

10 ACCOUNTS RECEIVABLE AND PREPAYMENTS (continued)

As of 31 December 2008 and 2007 other receivables include RR 33,680 and RR 215,926, respectively, relating to the operations of Group's banking subsidiaries. As of 31 December 2007 other receivables of banking subsidiaries were presented by OAO Gazprombank. The bank was deconsolidated in June 2008 (see Note 34). This balance mainly represents deposits with other banks and loans issued to customers at commercial rates based on credit risks and maturities. 

Other receivables are mainly represented by accounts receivable from Russian customers. 

As of 31 December 2008 the average effective interest rates on banking deposits and loans equaled 6.5% on balances denominated in Russian Roubles and varied from 1.2% to 4.1% on balances denominated in foreign currencies. 

As of 31 December 2007 the average effective interest rates on banking deposits and loans ranged from 7.0% to 13.5% on balances denominated in Russian Roubles and from 3.3% to 8.8% on balances denominated in foreign currencies. 

The fair value of banking deposits and loans approximate the carrying values, as the majority of them are short-term in nature and are issued at commercial rates.

Approximately 2% and 3% of accounts receivable settled during the years ended 31 December 2008 and 2007, respectively, were settled via mutual settlements or other non-cash settlements. 

As of 31 December 2008 and 2007, trade receivables of RR 23,260 and RR 29,756, respectively, were past due but not impaired. These mainly relate to a number of customers for whom there is no recent history of material default. The ageing analysis of these trade receivables is as follows:

Ageing from the due date	31 December
	2008	2007
Up to 6 months	17,807	20,251
From 6 to 12 months	1,952	1,176
From 1 to 3 years	855	3,444
More than 3 years	2,646	4,885
	23,260	29,756

As of 31 December 2008 and 2007, trade receivables of RR 108,756 and RR 88,852, respectively, were impaired and provided for. The amount of the provision was RR 96,599 and RR 70,820 as of 31 December 2008 and 2007, respectively. The individually impaired receivables mainly relate to gas sales to certain Russian regions and FSU countries, which are in difficult economic situations. In the management's view a portion of the receivables will be recovered. The ageing analysis of these receivables is as follows:

Ageing from the due date	Gross book value		Provision		Net book value
	31 December		31 December		31 December
	2008	2007	2008	2007	2008	2007
Up to 6 months	11,583	9,824	(8,302)	(6,533)	3,281	3,291
From 6 to 12 months	11,146	10,623	(10,544)	(8,028)	602	2,595
From 1 to 3 years	26,652	29,562	(25,969)	(23,953)	683	5,609
More than 3 years	59,375	38,843	(51,784)	(32,306)	7,591	6,537
	108,756	88,852	(96,599)	(70,820)	12,157	18,032

As of 31 December 2008 and 2007, trade receivables of RR 358,579 and RR 259,523, respectively, were neither past due nor impaired. Management's experience indicates customer payment histories vary by geography. The credit quality of these assets can be analysed as follows:

	31 December
	2008	2007
Europe and other countries gas, crude oil, gas condensate and refined products debtors	212,625	151,983
FSU gas, crude oil, gas condensate and refined products debtors	80,526	53,121
Domestic gas, crude oil, gas condensate and refined products debtors	27,349	26,867
Power sales debtors	3,733	2,555
Transportation services debtors	3,653	2,287
Other trade debtors	30,693	22,710
Total trade receivables neither past due, nor impaired	358,579	259,523

10 ACCOUNTS RECEIVABLE AND PREPAYMENTS (continued)

As of 31 December 2008 and 2007, trade receivables that would otherwise be past due whose terms have been renegotiated, amounted to RR 13,384 and RR 7,445, respectively. 

Movements of the Group provision for impairment of trade receivables are as follows:

		Trade receivables		Other receivables
		Year ended  31 December		Year ended  31 December
		2008	2007	2008	2007
Impairment provision at the beginning of the year		70,820	66,020	19,669	23,951
Impairment provision accrued*		30,880	12,614	4,390	893
Write-off of receivables during the year		(677)	(529)	(56)	(41)
Release of previously created provision*		(1,849)	(4,913)	(1,157)	(5,134)
Unwind of discounting*		(1,400)	(2,372)	-	-
Acquisition of subsidiaries		-	-	1,235	-
Gazprombank Group deconsolidation (see Note 34)		(1,175)	-	(7,655)	-
Impairment provision at the end of the year		96,599	70,820	16,426	19,669

* The accrual and release of provision for impaired receivables and effect of discounting have been included in impairment provision and other provisions in the consolidated statement of income. 

Amounts charged to the allowance account are generally written off, when there is no expectation of recovering additional cash. 

 

11. INVENTORIES

	31 December
	2008	2007
Gas in pipelines and storage	132,085	109,840
Materials and supplies (net of an obsolescence provision of RR 409 and RR 1,653 as of 31 December 2008 and 2007, respectively)	114,918	89,675
Goods for resale (net of an obsolescence provision of RR 165 and RR 143 as of 31 December 2008 and 2007, respectively)	16,069	18,376
Crude oil and refined products	13,882	27,515
	276,954	245,406

12. PROPERTY, PLANT AND EQUIPMENT

	Pipelines	Wells	Machinery and equipment	Buildings and roads	Produc-tion licenses	Social  assets	Assets  under construction	Total
As of 31.12.06
Cost	1,621,078	595,817	1,020,655	1,024,589	305,314	90,081	374,995	5,032,529
Accumulated depreciation	(782,076)	(234,512)	(490,762)	(429,980)	(30,865)	(29,366)	-	(1,997,561)
Net book value at 31.12.06	839,002	361,305	529,893	594,609	274,449	60,715	374,995	3,034,968
Depreciation	(44,298)	(18,561)	(60,286)	(36,273)	(22,619)	(2,559)	-	(184,596)
Additions	69	84	16,422	903	17,595	188	533,141	568,402
Acquisition of subsidiaries	-	-	49,834	42,920	-	25	16,575	109,354
Transfers	77,261	60,499	109,078	100,231	-	2,861	(349,930)	-
Disposals	(146)	(594)	(5,464)	(7,413)	-	(5,748)	(18,276)	(37,641)
Release of (charge for) impairment provision	55	38	132	22	-	-	(257)	(10)
Net book value at 31.12.07	871,943	402,771	639,609	694,999	269,425	55,482	556,248	3,490,477
As of 31.12.07
Cost	1,698,146	654,681	1,190,182	1,156,744	322,907	83,597	556,248	5,662,505
Accumulated depreciation	(826,203)	(251,910)	(550,573)	(461,745)	(53,482)	(28,115)	-	(2,172,028)
Net book value at 31.12.07	871,943	402,771	639,609	694,999	269,425	55,482	556,248	3,490,477
Depreciation	(44,990)	(20,395)	(70,692)	(41,229)	(20,482)	(2,407)	-	(200,195)
Additions	404	275	8,953	7,869	5,838	1,615	689,169	714, 123
Acquisition of subsidiaries	18,124	-	60,375	82,491	-	7	5,802	166,799
Disposal of subsidiaries	(48)	-	(25,198)	(18,703)	-	(800)	(27,742)	(72,491)
Transfers	85,402	59,253	156,243	139,990	-	5,252	(446,140)	-
Disposals	(20)	(1,921)	(4,044)	(1,819)	-	(3,633)	(12,589)	(24,026)
Charge for impairment provision	-	-	(22,470)	(25,954)	-	-	(5,741)	(54,165)
Net book value at 31.12.08	930,815	439,983	742,776	837,644	254,781	55,516	759,007	4,020,522
As of 31.12.08
Cost	1,802,481	710,643	1,348,119	1,332,316	328,745	82,248	759,007	6,363,559
Accumulated depreciation	(871,666)	(270,660)	(605,343)	(494,672)	(73,964)	(26,732)	-	(2,343,037)
Net book value at 31.12.08	930,815	439,983	742,776	837,644	254,781	55,516	759,007	4,020,522

At each balance sheet date management assesses whether there is any indication that the recoverable value has declined below the carrying value of the property, plant and equipment. Based on the results of the impairment tests the Group recognized in 2008, an impairment loss of RR 48,424 for power generating assets (see Note 35). The impairment was primarily triggered by the increase in discount rates, projected reduction in electricity consumption and expected oil and electricity prices. The increase in discount rates was caused by unfavourable changes in macroeconomic indicators. As of 31 December 2008 and 2007 operating assets are shown net of provision for impairment of RR 50,750 and RR 2,326, respectively. 

Assets under construction are presented net of a provision for impairment of RR 93,826 and RR 92,060 as of 31 December 2008 and 2007, respectively. Charges for impairment provision of assets under construction primarily relate to projects that have been indefinitely suspended and currently excluded from the Group's investment program.

Included in the property, plant and equipment are social assets (such as rest houses, housing, schools and medical facilities) vested to the Group at privatization with a net book value of RR 4,167 and RR 7,080 as of 31 December 2008 and 2007, respectively.

Included in additions above is capitalized interest of RR 28,001 and RR 19,661 for the years ended 31 December 2008 and 2007, respectively. Capitalization rates of 7.39% and 7.00% were used representing the weighted average borrowing cost of the relevant borrowings for the years ended 31 December 2008 and 2007, respectively.

Depreciation expenses in the consolidated statement of income do not include depreciation, which is considered as a cost of self-constructed assets (and thus capitalized rather than expensed) in amount of RR 2,319 and RR 1,518 for the years ended 31 December 2008 and 2007, respectively. Moreover, depreciation expenses in the consolidated statement of income do not include depreciation that is capitalized as a component of cost of inventories, consisting primarily of depreciation that is capitalized in cost of gas in amount of RR 4,471 and RR 2,359 for the years ended 31 December 2008 and 2007, respectively.

13. INVESTMENTS IN ASSOCIATED UNDERTAKINGS AND JOINTLY CONTROLLED ENTITIES 

		Carrying value as of 31 December		Group's share of the profit (loss)* for
Notes		2008	2007	2008	2007
	Sakhalin Energy Investment Company Ltd.	234,917	239,606	(10,325)	669
36	OAO NGK Slavneft and its subsidiaries	151,151	145,464	8,774	10,007
36	OAO NOVATEK	75,363	68,973	4,446	3,631
36	OAO Tomskneft VNK and its subsidiaries	69,286	88,181	(19,033)	-
36	Wintershall Gas GmbH & Co. KG	44,428	31,339	7,284	4,302
36	OAO TGC-1	32,309	-	(6,950)	-
36	OAO Beltransgaz	28,179	-	(3,322)	-
37	Nord Stream AG	25,528	-	(58)	-
36	OAO Salavanefteorgsyntez	20,959	-	-	-
34, 36	Gazprombank Group**	-	-	(37,667)	-
36	SGT EuRoPol GAZ S.A.	16,921	31,131	(1,273)	2,664
	OAO Moscovsky NPZ	15,922	15,548	374	282
	Wintershall AG	12,856	10,259	3,459	-
36	TOO KazRosGaz	9,898	4,388	4,693	2,747
	OOO Sibmetakhim	4,153	-	808	-
36	AO Latvijas Gaze	4,100	3,571	373	563
	ZAO Nortgaz	3,876	2,843	1,034	795
	Shtokman Development AG	2,622	-	86	-
36	AO Lietuvos Dujos	2,226	2,095	9	391
36, 37	Blue Stream Pipeline company B.V.	1,232	895	147	(10)
36	RosUkrEnergo AG	33	73	25,334	(5,720)
	Other (net of provision for impairment of RR 3,000 and RR 5,819 as of 31 December 2008 and  31 December 2007, respectively)	16,184	26,037	5,121	3,913
		772,143	670,403	(16,686)	24,234

* represents Group's share of the profit (loss) of the associated undertakings and jointly controlled entities for the years ended 31 December 2008 and 2007, respectively, or for the period during which a company was included in investments in associated undertakings and jointly controlled entities.

** Gazprombank Group is accounted for as equity investment since 24 June 2008 due to deconsolidation of Gazprombank Group (see Note 34). The Group ceased to consolidate OAO Gazprombank and its subsidiaries from this date. The Group's share of Gazprombank Group's net loss from the date of the deconsolidation exceeded the investment resulting in reducing the carrying value to RR nil.

		Year ended  31 December
		2008	2007
Balance at the beginning of the reporting period		670,403	318,142
Reclassification of investment in OAO Beltransgaz from Available-for-sale long-term financial assets		16,156	-
Share of net (loss) income of associated undertakings and jointly controlled   entities (see Note 35)		(16,686)	24,234
Distribution from associated undertakings and jointly controlled entities		(38,434)	(10,933)
Translation differences		5,559	3,683
Gazprombank Group deconsolidation (see Note 34)		(4,740)	-
Change in equity of associated undertakings and jointly controlled entities		(4,972)	-
Acquisitions and disposals		144,857	335,277
Balance at the end of the reporting period		772,143	670,403

13 INVESTMENTS IN ASSOCIATED UNDERTAKINGS AND JOINTLY CONTROLLED ENTITIES (continued)

Summarised financial information on the Group's principal associated undertakings and jointly controlled entities is as follows:

		Assets	Liabilities	Revenues	Profit (loss)
	31 December 2008
	Gazprombank Group*	1,999,778	1,863,070	141,912	(91,981)
	Sakhalin Energy Investment Company Ltd.	687,285	238,280	18,518	(20,649)
	OAO NGK Slavneft and its subsidiaries	617,671	255,128	183,383	12,019
	Wintershall Gas GmbH & Co. KG	159,329	127,328	350,749	17,735
	OAO Tomskneft VNK and its subsidiaries	155,267	98,273	80,562	1,933
	OAO NOVATEK	139,907	43,267	79,272	22,899
	RosUkrEnergo AG	122,178	94,025	373,150	22,463
	OAO TGC-1**	79,286	16,493	15,083	95
	Blue Stream Pipeline company B.V.	69,123	64,330	7,324	591
	SGT EuRoPol GAZ S.A.	61,304	26,053	12,485	(1,166)
	OAO Salavatnefteorgsyntez***	59,661	35,764	-	-
	Nord Stream AG*****	56,385	4,309	1	(116)
	OAO Beltransgaz****	55,980	16,114	71,295	2,805
	OAO Moscovsky NPZ	46,703	3,615	10,745	966
	AO Lietuvos Dujos	30,437	7,794	17,390	715
	AO Latvijas Gaze	28,762	9,643	19,320	1,097
	Wintershall AG	24,529	9,840	106,493	7,029
	TOO KazRosGaz	20,956	1,159	25,675	9,385
	ZAO Nortgaz	10,792	3,194	5,762	2,027
	Shtokman Development AG	10,295	4,354	-	169
	OOO Sibmetakhim******	8,972	665	4,946	2,795
	* Deconsolidation of Gazprombank Group since 24 June 2008 (see Note 34). The revenue and loss of Gazprombank Group are disclosed from the date it was accounted for as equity investment to 31 December 2008.  Presented revenue of Gazprombank Group is identified according to the Group accounting policy and includes revenue of petrochemical business, media business, heavy machinery business and other non-banking companies. ** In July 2008 the Group acquired 28.7% interest in OAO TGC-1 for RR 39,219. The revenues and profit of OAO TGC-1 for the year ended 31 December 2008 are disclosed from the date of acquisition. *** The revenues and profit (loss) of OAO Salavatnefteorgsyntez for the year ended 31 December 2008 are not disclosed as it was acquired in late 2008. **** In February 2008 the Group purchased 12.5% interest in OAO Beltransgaz for USD 625 million. As a result the Group increased its interest in OAO Beltransgaz up to 25%. The revenues and profit of OAO Beltransgaz for the year ended 31 December 2008 are disclosed from the date of acquisition of additional shares. ***** In the first half of 2008 the Group contributed additional RR 21,686 into the charter capital of Nord Stream AG. The Group's interest did not change as a result of this transaction. ****** Group's share in OOO Sibmetakhim decreased to 50% due to deconsolidation of Gazprombank Group (see Note 34).
	31 December 2007	Assets	Liabilities	Revenues	Profit (loss)
	Sakhalin Energy Investment Company Ltd.*	454,270	83,904	21,143	(31,442)
	OAO NGK Slavneft and its subsidiaries	402,339	101,857	159,584	13,625
	Wintershall Gas GmbH & Co. KG	112,143	92,028	215,230	8,733
	OAO NOVATEK	103,975	22,163	62,431	18,736
	RosUkrEnergo AG	96,683	74,609	259,059	20,770
	OAO Tomskneft VNK and its subsidiaries*	74,479	53,067	-	-
	SGT EuRoPol GAZ S.A.	62,469	25,571	14,249	5,441
	OAO Stroytransgaz	58,244	39,315	37,971	428
	Blue Stream Pipeline company B.V.	57,621	54,155	6,734	(39)
	OAO Moscovsky NPZ	43,633	3,615	9,611	696
	AO Lietuvos Dujos	25,420	5,472	10,413	1,056
	AO Latvijas Gaze	24,374	7,694	12,081	1,656
	Wintershall AG*	23,216	12,261	-	-
	TOO KazRosGaz	9,693	916	15,921	5,494
	ZAO Nortgaz	7,911	2,339	5,498	1,559
	* The revenues and profit (loss) of Sakhalin Energy Investment Company Ltd. for the year 2007 are disclosed from the date of acquisition. The revenues and profit (loss) of OAO Tomskneft VNK and its subsidiaries and of Wintershall AG for the year ended 31 December 2007 are not disclosed as they was acquired in late 2007.

13 INVESTMENTS IN ASSOCIATED UNDERTAKINGS AND JOINTLY CONTROLLED ENTITIES (continued)

The estimated fair values of investments in associated undertakings for which there are published price quotations were as follows:

		31 December
		2008	2007
	OAO NOVATEK	33,130	111,149
	AO Lietuvos Dujos	7,387	6,365
	OAO TGC-1	3,761	-
	AO Latvijas Gaze	3,193	7,161

Principal associated undertakings and jointly controlled entities 

			% of ordinary shares held as of  31 December*
Entities	Country	Nature of operations	2008	2007
ZAO Achimgaz	Russia	Exploration and production of gas	50	50
OAO Beltransgaz	Belarus	Transportation and gas supply	25	-
Blue Stream Pipeline company B.V. (BSPC)	Netherlands	Construction, gas transportation	50	50
Bosphorus Gaz Corporation A.S.	Turkey	Gas distribution	40	40
Centrex Beteiligungs GmbH	Austria	Gas distribution	38	38
SGT EuRoPol GAZ S.A.	Poland	Transportation and gas distribution	48	48
Gaz Project Development Central Asia AG	Switzerland	Gas distribution	50	50
OAO Gazprombank	Russia	Banking	45	45
АО Gazum	Finland	Gas distribution	25	25
TOO KazRosGaz	Kazakhstan	Gas processing and sale of gas and refined products	50	50
АО Latvijas Gaze	Latvia	Transportation and gas distribution	34	34
АО Lietuvos Dujos	Lithuania	Transportation and gas distribution	37	37
АО Moldovagaz	Moldova	Transportation and gas distribution	50	50
OAO Moskovsky NPZ	Russia	Processing and distribution of refined products	39	39
ZAO Nortgaz	Russia	Exploration and sale of gas and gas condensate	51	51
OAO NOVATEK	Russia	Production and distribution of gas	19	19
Nord Stream AG	Switzerland	Construction, gas transportation	51	51
AO Overgaz Inc.	Bulgaria	Gas distribution	50	50
ZAO Panrusgaz	Hungary	Gas distribution	40	40
AO Prometheus Gas	Greece	Foreign trade activity, construction	50	50
RosUkrEnergo AG	Switzerland	Gas distribution	50	50
Sakhalin Energy Investment Company Ltd.	Bermuda Islands	Oil production, production of LNG	50	50
OAO Salavatnefteorgsyntez**	Russia	Processing and distribution of refined products	50	-
OOO Sibmetakhim	Russia	Gas processing and sale of petrochemicals	50	100
OAO NGK Slavneft	Russia	Production of oil, sale of oil and refined products	50	50
Shtokman Development AG	Switzerland	Exploration and production of gas	51	-
OAO TGC-1	Russia	Production and transfer of electric and heat energy	29	-
OAO Tomskneft VNK	Russia	Oil production	50	50
АО Turusgaz	Turkey	Gas distribution	45	45
Vemex s.r.o	Czech Republic	Gas distribution	33	33
Wintershall AG	Germany	Production of oil and gas distribution	49	49
Wintershall Gas GmbH & Co. KG	Germany	Transportation and gas distribution	50	50
Wintershall Erdgas Handelshaus GmbH & Co.KG (WIEH)	Germany	Gas distribution	50	50
Wintershall Erdgas Handelshaus ZUG AG (WIEE)	Switzerland	Gas distribution	50	50

14. LONG-TERM ACCOUNTS RECEIVABLE AND PREPAYMENTS 

		31 December
		2008	2007
	Long-term accounts receivable and prepayments (net of impairment provision of RR 17,303 and RR 17,507  as of 31 December 2008 and 2007, respectively)	150,502	270,430
	Advances for assets under construction (net of impairment provision of RR 6 and RR 127 of 31 December 2008 and 2007, respectively)	193,303	131,952
		343,805	402,382

As of 31 December 2008 and 2007 long-term accounts receivable included RR 33,163 and RR 180,620, relating to the operations of Group's banking subsidiaries, respectively. As of 31 December 2007 long-term accounts receivable of the banking subsidiaries were presented by OAO Gazprombank. The bank was deconsolidated in June 2008 (see Note 34). This balance mainly represents deposits and long-term loans issued to customers at commercial rates based on credit risk and maturities.

As of 31 December 2008 and 2007, long-term accounts receivable and prepayments with carrying value RR 150,502 and RR 270,430 have the estimated fair value RR 146,663 and RR 268,144, respectively.

Long-term accounts receivable and prepayments include prepayments in amount of RR 3,136 and nil as of 31 December 2008 and 2007 respectively.

Long-term accounts receivable of RR 71,029 and RR 207,039 as of 31 December 2008 and 2007, respectively, were impaired and provided for. These receivables as of 31 December 2008 and 2007 mainly related to banking subsidiaries operations. The amount of the provision was RR 17,303 and RR 17,507 as of 31 December 2008 and 2007, respectively. 

As of 31 December 2008 and 2007, long-term accounts receivable of RR 3 and RR 689, respectively, were past due but not impaired.

As of 31 December 2008 and 2007, long-term accounts receivable of RR 96,773 and RR 80,209, respectively, were neither past due, nor impaired. The credit quality of these assets can be analysed as follows:

	31 December
	2008	2007
Accounts receivable of Group's banking subsidiaries	151	12,516
Long-term loans	80,579	31,697
Long-term trade receivables	10,097	26,267
Other long-term receivables	5,946	9,729
Total long-term accounts receivable neither past due, nor impaired	96,773	80,209

Management experience indicates that long-term loans and other long-term receivables are of lower credit quality than accounts receivable of Group's banking subsidiaries and long-term trade receivables.

As of 31 December 2008 and 2007, trade receivables that would otherwise be past due whose terms have been renegotiated, amounted to RR 7,548 and RR 9,974, respectively. 

Movements of the Group provision for impairment of accounts receivable are as follows:

		Year ended 31 December
		2008	2007
Impairment provision at the beginning of the year		17,507	15,085
Impairment provision accrued*		6,361	3,261
Release of previously created provision*		-	(839)
Acquisition of subsidiaries		2,181	-
Gazprombank Group deconsolidation (see Note 34)		(8,746)	-
Impairment provision at the end of the year	17,303	17,507
* The accrual and release of provision for impaired receivables have been included in impairment provision and other provisions in the consolidated statement of income.

15. AVAILABLE-FOR-SALE LONG-TERM FINANCIAL ASSETS 

	31 December
	2008	2007
Equity instruments at fair value:
RAO UES of Russia	-	143,407
OAO WGC-2*, OAO WGC-6* and other energy assets (net of provision for impairment of RR 7,545 and RR nil as of 31 December 2008 and 2007,  respectively)	14,567	46,693
Other (net of provision for impairment of RR 1,468 and RR 2,209 as of 31 December 2008 and 2007, respectively)	13,850	63,192
Debt instruments (net of provision for impairment of RR nil and RR 258 as of 31 December 2008 and 2007, respectively)	19,769	2,918
	48,186	256,210

* Investment in OAO WGC-2 and OAO WGC-6 are presented within available-for-sales financial statements as of 31 December 2007. The Group held a 10.49% interest in the share capital of RAO UES of Russia as of 31 December 2007. 1 July 2008 as a result of the reorganization of RAO UES of Russia the Group obtained interest in certain energy and power generation companies including OAO WGC-2 and OAO WGC-6 which are both consolidated from 1 July 2008 (see Note 33). 

The fair value of the majority of the Group's equity instruments was determined on the basis of market quotations.

	Year ended
	31 December
Movements in long-term available-for-sale assets	2008	2007
Balance at the beginning of the year	256,210	150,874
Decrease in  fair value recognized in equity (see Note 21)	(77,952)	-
Increase in fair value recognized in equity	-	21,201
Purchased available-for-sale assets	5,627	90,199
Consolidation of OAO WGC-2 and OAO WGC-6 (see Note 33)	(89,577)	-
Gazprombank Group deconsolidation (see Note 34)	(20,437)	-
Reclassification of investment in OAO Beltransgaz (see Note 13)	(16,156)	-
Available-for-sale assets disposed	(997)	(5,700)
Impairment on available-for-sale assets	(8,532)	(364)
Balance at the end of the year	48,186	256,210

The maximum exposure to credit risk at the reporting date is the fair value of the debt securities classified as available-for-sale. The impairment of available-for-sale assets has been performed using the quoted market prices.

None of the financial assets that are fully performing have been renegotiated in the reporting period.

16. OTHER NON-CURRENT ASSETS 

Included within other non-current assets is VAT recoverable related to assets under construction totalling RR 49,560 and RR 24,135 as of 31 December 2008 and 2007, respectively.

Included within other non-current assets as of 31 December 2007 is the fair value of the call option with ENI S.p.A. to acquire its 20% interest in OAO Gazprom Neft (see Note 40) in the amount of RR 50,738. The fair value of this option is RR nil as of 31 December 2008. 

Other non current assets include net pension assets in the amount of RR 243,982 as of 31 December 2008 and 31 December 2007 (see Note 23).

17. ACCOUNTS PAYABLE AND ACCRUED CHARGES

	31 December
	2008	2007
Financial liabilities
Trade payables	210,858	144,532
Accounts payable for acquisition of property, plant and equipment	111,483	82,890
Liabilities of Group's banking subsidiaries	24,344	195,227
Other payables	94,819	49,970
	441,504	472,619
Non-financial liabilities
Advances received	24,025	10,009
Accruals and deferred income	1,228	2,838
	25,253	12,847
	466,757	485,466

Liabilities of Group's banking subsidiaries represent amounts due to the bank's customers with terms at commercial rates ranging from 0.01% to 8.5% per annum and from 0.9% to 8.0% per annum as of 31 December 2008 and 2007, respectively.

For the years ended 31 December 2008 and 2007 approximately 5% and 8% of the Group's settlements of accounts payable and accrued charges were made by non-cash settlements.

Trade payables of RR 16,364 and RR 41,243 were denominated in foreign currency, mainly the US dollar and Euro, as of 31 December 2008 and 2007, respectively. Book values of accounts payable approximate their fair value.

18. OTHER TAXES PAYABLE

	31 December
	2008	2007
VAT	20,134	17,000
Natural resources production tax	10,593	16,595
Excise tax	3,131	3,626
Property tax	7,395	5,258
Tax penalties and interest	151	1,955
Other taxes	9,342	6,274
	50,746	50,708
Less: long-term portion of restructured tax liabilities	(124)	(178)
	50,622	50,530

19. SHORT-TERM BORROWINGS AND PROMISSORY NOTES AND CURRENT PORTION OF LONG-TERM BORROWINGS 

	31 December
	2008	2007
Short-term borrowings:
RR denominated borrowings	90,770	129,331
Foreign currency denominated borrowings	102,851	100,596
	193,621	229,927
Current portion of long-term borrowings (see Note 20)	239,019	274,143
	432,640	504,070

Short-term RR denominated borrowings had average interest rates ranging from 9.6% to 18.0% and from 7.0% to 10.5% for the years ended 31 December 2008 and 2007, respectively. Short-term foreign currency denominated borrowings had average interest rates ranging from 3.2% to 8.5% and from 4.4% to 8.9% for the years ended 31 December 2008 and 2007, respectively.

19  SHORT-TERM BORROWINGS AND PROMISSORY NOTES AND CURRENT PORTION OF LONG-TERM BORROWINGS (continued)

As of 31 December 2008 and 2007, respectively, short-term borrowings include RR 59,484 and RR 176,716 of short-term borrowings of bank subsidiaries. 

The Group's short-term promissory notes payable had average interest rates ranging from 0% to 13.1% and from 5.7% to 7.2% for the years ended 31 December 2008 and 2007, respectively.

Fair values approximate the carrying value of these liabilities. 

20. LONG-TERM BORROWINGS AND PROMISSORY NOTES

		Final	31 December
	Currency	Maturity	2008	2007
Long-term borrowings payable to:
Credit Suisse International	JPY	2018	58,654	-
ABN AMRO Bank N.V.	US dollar	2013	53,065	44,334
Loan participation notes issued in October 20071	Euro	2018	52,628	43,651
Loan participation notes issued in June 20071	GBP	2013	47,201	39,435
ABN AMRO Bank N.V.2	US dollar	2012	44,245	49,614
Loan participation notes issued in May 20051	Euro	2015	42,861	37,165
Loan participation notes issued in September 20031	Euro	2010	42,291	36,668
Loan participation notes issued in December 20051	Euro	2012	41,557	36,033
Calyon Credit Agricole CIB2	US dollar	2010	41,183	54,289
Loan participation notes issued in November 20061	US dollar	2016	39,930	33,360
Loan participation notes issued in March 20071	US dollar	2022	38,982	32,568
Loan participation notes issued in August 20071	US dollar	2037	37,729	31,521
Loan participation notes issued in April 20041	US dollar	2034	35,789	29,900
Loan participation notes issued in October 20061	Euro	2014	33,706	29,225
Loan participation notes issued in April 20081	US dollar	2018	32,903	-
Structured export notes issued in July 20043	US dollar	2020	30,451	28,645
WestLB AG2	US dollar	2013	29,760	-
Loan participation notes issued in June 20071	Euro	2014	29,273	25,382
Deutsche Bank AG	US dollar	2014	25,553	29,618
Loan participation notes issued in November 20061	Euro	2017	21,552	18,685
Salomon Brothers AG	US dollar	2009	20,975	17,524
Loan participation notes issued in March 20071	Euro	2017	20,906	18,127
Dresdner Bank AG2	US dollar	2010	18,558	23,283
ABN AMRO Bank N.V.2	US dollar	2010	18,535	24,429
Credit Suisse International	Euro	2009	16,680	14,467
Salomon Brothers AG	US dollar	2009	15,436	12,903
Credit Suisse International	US dollar	2017	15,414	12,877
Loan participation notes issued in July 20081	US dollar	2013	15,107	-
Credit Suisse International	US dollar	2009	14,712	12,292
Commerzbank AG2	US dollar	2010	12,358	-
Loan participation notes issued in April 20081	US dollar	2013	11,944	-
OOO Aragon4	Euro	2010	11,397	9,882

20. LONG-TERM BORROWINGS AND PROMISSORY NOTES (continued)

		Final	31 December
	Currency	Maturity	2008	2007
Credit Suisse International	Euro	2010	10,418	9,036
Сredit Suisse International	Euro	2009	8,466	7,246
Deutsche Bank AG	US dollar	2011	8,455	8,718
Loan participation notes issued in November 20071	JPY	2012	7,729	6,457
ОАО Bank of Moscow	Rouble	2010	7,529	-
OAO Gazprombank	Rouble	2012	7,508	-
BNP Paribas SA2	US dollar	2009	5,946	4,913
Credit Suisse International	US dollar	2009	5,894	4,931
Russian bonds issued in July 20075	Rouble	2010	5,192	-
Russian bonds issued in February 2005	Rouble	2010	5,158	5,155
Loan participation notes issued in November 20071	JPY	2010	5,151	4,303
Russian bonds issued in February 2007	Rouble	2014	5,132	5,130
Russian bonds issued in August 2005	Rouble	2009	5,100	5,137
ABN AMRO Bank N.V.2	US dollar	2013	5,068	-
Russian bonds issued in November 2006	Rouble	2011	5,059	5,058
Russian bonds issued in November 2006	Rouble	2009	5,058	5,056
Russian bonds issued in September 20066	Rouble	2011	4,908	5,107
Citibank International PLC	US dollar	2009	4,803	10,908
Russian bonds issued in March 20066	Rouble	2016	4,731	5,129
Wintershall Holding AG4	Euro	2010	4,686	4,063
Gazstream S.A.	US dollar	2010	4,638	5,673
Gazstream S.A.	US dollar	2012	4,565	4,768
JP Morgan Chase bank	US dollar	2011	4,429	4,942
European bank for reconstruction and development	Rouble	2012	3,878	4,321
OAO Gazprombank	US dollar	2010	2,978	-
Russian bonds issued in April 20075	Rouble	2012	2,915	-
European bank for reconstruction and development	Rouble	2018	2,792	2,914
ОАО Bank of Moscow	Rouble	2009	2,533	-
ABN AMRO Bank N.V.	US dollar	2009	2,453	4,105
Citibank International PLC2	US dollar	2008	-	43,051
Credit Suisse International	US dollar	2008	-	40,250
Eurobonds issued in September 20057	US dollar	2015	-	24,768
Eurobonds issued in October 20037	US dollar	2008	-	18,607
Eurobonds issued in April 20077	US dollar	2010	-	17,145
Dresdner Bank AG2	US dollar	2008	-	15,516
Depfa Investment Bank Ltd.2	US dollar	2008	-	12,590
Sumitomo Mitsui Banking Corporation Europe Limited2	US dollar	2008	-	12,326
Credit Suisse International	US dollar	2008	-	12,041
JP Morgan Chase bank	Rouble	2008	-	11,833
Eurobonds issued in February 20077	Rouble	2010	-	10,219
Eurobonds issued in January 20047	US dollar	2008	-	7,443
Credit Suisse International	Euro	2008	-	7,279
Wintershall Holding AG4	Rouble	2008	-	6,975
ABN AMRO Bank N.V.2	US dollar	2008	-	5,674
Liberty Hampshire Corporation	Rouble	2008	-	5,067
ABN AMRO Bank N.V.2	US dollar	2008	-	4,450
Mannesmann (Deutsche Bank AG)2	Euro	2008	-	3,011

20. LONG-TERM BORROWINGS AND PROMISSORY NOTES (continued)

		Final	31 December	31 December
	Currency	Maturity	2008	2007
Wintershall Holding AG4	Rouble	2008	-	3,000
Other long-term borrowings	Various	Various	37,742	125,359
Total long-term borrowings			1,162,249	1,255,551
Less: current portion of long-term borrowings			(239,019)	(274,143)
			923,230	981,408

1 Issuer of these bonds is Gaz Capital S.A. 

2 Loans received from syndicate of banks, named lender is the bank-agent.

3 Issuer of these notes is Gazprom International S.A.

4 Loans were obtained for development of Yuzhno-Russkoye oil and gas field.

5 Issuers of these notes are OAO WGC-2 and OAO WGC-6. 

6 Issuer of these bonds is OAO Mosenergo.

7 Issuer of these bonds is OAO Gazprombank.

	31 December
	2008	2007
RR denominated borrowings (including current portion of RR 20,487 and RR 29,373 as of 31 December 2008 and 2007, respectively)	95,035	165,146
Foreign currency denominated borrowings (including current portion of RR 218,532 and RR 244,770 as of 31 December 2008 and 2007, respectively)	1,067,214	1,090,405
	1,162,249	1,255,551

	31 December
Due for repayment:	2008	2007
Between one and two years	181,615	188,171
Between two and five years	267,294	277,673
After five years	474,321	515,564
	923,230	981,408

Long-term borrowings include fixed rate loans with a carrying value of RR 914,237 and RR 869,194 and fair value of RR 749,630 and RR 871,253 as of 31 December 2008 and 2007, respectively. All other long-term borrowings have variable interest rates generally linked to LIBOR, and the difference between carrying value of these liabilities and its fair value is not significant.

As of 31 December 2008 and 31 December 2007 long-term borrowings include RR 18,442 (including current portion of RR nil) and RR 162,259 (including current portion of RR 20,611), relating to the operations of Group's banking subsidiaries, respectively. As of 31 December 2007 long-term borrowings of the banking subsidiaries were mainly presented by OAO Gazprombank. The bank was deconsolidated in June 2008 (see Note 34). 

As of 31 December 2008 and 2007, the Group did not have material formal hedging arrangements to mitigate its foreign exchange risk or interest rate risk. 

The weighted average effective interest rates at the balance sheet date were as follows:

	31 December
	2008	2007
Fixed rate RR denominated long-term borrowings	7.30%	7.29%
Fixed rate foreign currency denominated long-term borrowings	6.59%	5.96%
Variable rate foreign currency denominated long-term borrowings	4.64%	6.34%

As of 31 December 2008 and 2007 long-term borrowings of RR 30,451 and RR 28,645, respectively, inclusive of current portion of long-term borrowings, are secured by revenues from export supplies of gas to Western Europe. 

The Group has no subordinated debt and no debt that may be converted into an equity interest in the Group (see Note 24). 

The Group's long-term promissory notes payable had average interest rates ranging from 0% to 11.4% and from 6.9% to 8.3% for the years ended 31 December 2008 and 2007, respectively.

21. PROFIT TAX

Profit before profit tax for financial reporting purposes is reconciled to profit tax expense as follows:

		Year ended 31 December
Notes		2008	2007
	Profit before profit tax	1,031,632	924,204
	Theoretical tax charge calculated at applicable tax rates	(247,592)	(223,422)
	Tax effect of items which are not deductible or assessable for taxation purposes:
	Non-deductible expenses incl.:	(71,084)	(48,019)
13,35	Non-deductable expenses on impairment loss for associated undertakings and jointly controlled entities	(6,764)	-
16	Non-deductable expenses from call option fair value change	(12,177)	-
	Non-taxable income from sale of subsidiary	-	13,818
16	Non-taxable income from call option fair value change	-	12,177
	Non-taxable income from Gazfund deconsolidation	-	10,726
	Other non-taxable income	6,194	5,501
	Effect of reduction in tax rate to 20% enacted in 2008 with effect from 1 January 2009	52,230	-
	Profit tax expense	(260,252)	(229,219)

Profit tax expense in the consolidated statement of income is stated net of RR 424 and RR 221 of tax attributable to gains arising on treasury shares transactions for the years ended 31 December 2008 and 2007, respectively.

In November 2008 the Federal Law on amendments to the Russian Tax Code enacted the decrease in corporate profit tax rate from 24% to 20%, effective from 1 January 2009. This tax rate was applied to determine the deferred tax liabilities as of 31 December 2008. 

Differences between the recognition criteria in Russian statutory taxation regulations and IFRS give rise to certain temporary differences between the carrying value of certain assets and liabilities for financial reporting purposes and for profit tax purposes. The tax effect of the movement on these temporary differences is recorded at the enacted from 1 January 2009 rate of 20% (for the year ended 31 December 2007: 24%).

		31 December 2008	Effect from tax rate change	Differences recognition and reversals at 24% rate	31 December 2007	Differences recognition and reversals	31 December 2006
	Tax effects of taxable temporary differences:
	Property, plant and equipment	(248,706)	49,843	(31,584)	(266,965)	(25,226)	(241,739)
	Financial assets	(19,332)	2,939	18,889	(41,160)	(3,048)	(38,112)
	Inventories	(1,821)	364	1,816	(4,001)	(3,812)	(189)
		(269,859)	53,146	(10,879)	(312,126)	(32,086)	(280,040)
	Tax effects of deductible temporary differences:
	Tax losses carry forward	1,333	(267)	623	977	(729)	1,706
	Other deductible temporary differences	3,247	(649)	1,100	2,796	(30)	2,826
	Total net deferred tax liabilities	(265,279)	52,230	(9,156)	(308,353)	(32,845)	(275,508)

Taxable temporary differences recognized in 2008 include the effect of the acquisition of the controlling interest in OAO WGC-2 and OAO WGC-6 (see Note 33), including RR 29,136 related to property, plant and equipment. 

As of 31 December 2007 the taxable temporary differences include differences related to fair value adjustment on RAO UES of Russia shares and other energy assets in the amount of RR 28,251. During six months ended 30 June 2008, differences of RR 18,846 were reversed due to decreases in fair value of RAO UES of Russia shares and other energy assets. Difference at the amount of RR 9,405 was reversed due to the exchange of interest in RAO UES of Russia for ownership interests in certain energy companies (see Note 33).

Deferred tax assets and liabilities arise mainly from differences in the taxable and financial reporting bases of property, plant and equipment. These differences for property, plant and equipment are historically due to the fact that a significant proportion of the tax base was determined upon independent appraisals, the most recent of which was recognised for profit tax purposes as of 1  January  2001,  while  the  financial  reporting base is historical cost restated for changes in the general purchasing power of the RR until 31 December 2002.

21 PROFIT TAX (continued)

From 1 January 2002, any revaluation of property, plant and equipment recorded in the statutory accounting records is not recorded in the tax accounting records and therefore has no impact on temporary differences. 

In accordance with the tax legislation of the Russian Federation tax losses and current tax assets of a company of the Group may not be set off against taxable profits and current tax liabilities of other Group companies. In addition, the tax base is separately determined for main activities, income from operations with  securities  and  service  activities. Tax losses arising from one type of activity can not be offset with taxable profit of other types of activity. Also, a deferred tax asset of one company (type of activity) of the Group can not be offset against a deferred tax liability of another company (type of activity). As of 31 December 2008 and 2007 deferred tax assets on temporary differences in the amount of RR 20,669 and RR 17,583, respectively, have not been recorded because it is not probable that sufficient taxable profit of the Group subsidiaries will be available to allow the benefit of that deferred tax asset to be utilised.

The temporary differences associated with undistributed earnings of subsidiaries amount to RR 324,581 and RR 403,468 as of 31 December 2008 and 2007, respectively. A deferred tax liability on these temporary differences was not recognized because management controls the timing of the reversal of the temporary differences and believes that they will not reverse in the foreseeable future.

22. FINANCIAL INSTRUMENTS

As of 31 December 2008 the Group had outstanding commodity contracts and foreign currencies at the market price at the date of maturity. The Group expects to settle these contracts in the normal course of business. These instruments are generally traded in an over-the-counter market with professional market counterparties on standardized contractual terms and conditions. 

The following table provides an analysis of the Group's position and fair value of derivatives outstanding as of the end of the reporting period. Fair values of derivatives are reflected at their gross value in the balance sheet.

	31 December
	2008		2007
	Notional principal equivalents	Fair  value	Notional principal equivalents	Fair  value
Foreign exchange option contracts
Call options written - foreign	-	-	(6,251)	(557)
Put options written - foreign	-	-	(553)	(1)
	-	-	(6,804)	(558)
Foreign exchange forward contracts
Assets foreign	54,475	6,051	160,193	5,176
Assets domestic	-	-	75,799	1,864
Liabilities foreign	(12,974)	(339)	(86,984)	(1,231)
Liabilities domestic	-	-	(90,803)	(1,507)
	41,501	5,712	58,205	4,302
Securities option contracts
Put options written - foreign	-	-	(40,967)	(4,666)
	-	-	(40,967)	(4,666)
Securities forward contracts
Assets - foreign	-	-	3,008	2
Assets - domestic	-	-	3,976	101
Liabilities - foreign	-	-	(1,473)	(373)
Liabilities - domestic	-	-	(3,443)	(11)
	-	-	2,068	(281)
Swap contracts
Interest swap contracts (assets) - foreign	14,690	2,138	-	-
Currency swap contracts (assets) - foreign	988	105	5,063	199
Interest swap contracts (liabilities) - foreign	(2,756)	(44)	(12,528)	-
	12,922	2,199	(7,465)	199
Emission allowances
Assets	2,360	632	-	-
Liabilities	(5,495)	(542)	-	-
	(3,135)	90	-	-
Commodity contracts
Commodity contracts assets	321,816	46,947	103,119	16,265
Commodity contracts liabilities	(199,784)	(46,177)	(150,161)	(19,813)
	122,032	770	(47,042)	(3,548)

22 FINANCIAL INSTRUMENTS (continued)

The maturities of all derivative financial instruments are less than one year, and the majority of the contracts have maturities less than one month. All deals are fixed price contracts and are settled in the normal course of business.

The Group enters into contracts to receive and deliver commodities in accordance with its expected purchase, sale or usage requirements. Such contracts are not considered derivatives and are not included in the table above.

23. PROVISIONS FOR LIABILITIES AND CHARGES 

		31 December
		2008	2007
	Provision for environmental liabilities	50,550	51,604
	Provision for pension obligations	28,128	20,738
	Other	7,129	6,871
		85,807	79,213

The Group operates a defined benefit plan, concerning the majority of its employees. These benefits include pension benefits provided by the non-governmental pension fund, NPF Gazfund and certain post-retirement benefits, from the Group at their retirement date. 

Principal actuarial assumptions used:

		31 December
		2008	2007
Discount rate (nominal)		8.6%	6.6%
Future salary and pension increases (nominal)		6.5%	6.8%
Turnover ratio p.a.		4.2%	5%
Employees average remaining working life (years)		15	15

The assumptions relating to life expectancy at normal pension age were 17 years for a 60 year old man and 28 years for a 55 year old woman in 2008 and 2007. 

The Group expects a 6% return on the plan assets as at 31 December 2008 and 5% return as at 31 December 2007. 

The amounts associated with pension obligations recognized in the consolidated balance sheet are as follows:

	31 December 2008		31 December 2007
	Funded benefits - provided through NPF Gazfund	Unfunded liabilities - other benefits	Funded benefits - provided through NPF Gazfund	Unfunded liabilities - other benefits
Present value of benefit obligations	(182,590)	(49,687)	(207,880)	(55,344)
Fair value of plan assets	257,046	-	583,221	-
	74,456	(49,687)	375,341	(55,344)
Unrecognised net actuarial losses/(gains)	169,526	(1,535)	123,749	8,745
Unrecognised past service costs	-	23,094	-	25,861
Unrecognised plan assets above the limit	-	-	(255,108)	-
Net balance asset / (liability)	243,982	(28,128)	243,982	(20,738)

The net pension assets of RR 243,982 related to benefits provided by the pension plan NPF Gazfund is included within other non-current assets of RR 411,837 in the consolidated balance sheet. 

The amounts recognized in the consolidated statement of income are as follows:

	Year ended 31 December
	2008	2007
Current service cost	8,766	10,829
Interest on obligation	17,053	15,475
Expected return on plan assets	(29,161)	(22,131)
Net actuarial losses recognized for the year	273,178	6,855
Past service cost	1,650	1,767
Effect of asset restriction	(255,108)	23,435
Total operating expenses included in staff costs	16,378	36,230

23 PROVISIONS FOR LIABILITIES AND CHARGES (continued)

The total amount of benefits paid for 2008 and 2007 were equal to RR 5,078 and RR 3,524, respectively. 

Changes in the present value of the defined benefit obligations are the follows: 

	31 December 2008		31 December 2007
	Funded benefits - provided through NPF Gazfund	Unfunded liabilities - other  benefits	Funded benefits - provided through NPF Gazfund	Unfunded liabilities - other benefits
Opening defined benefit obligation	207,880	55,344	193,352	45,279
Service cost	5,979	2,787	7,704	3,252
Interest cost	13,504	3,549	12,580	3,076
Actuarial (gains)/losses	(40,620)	(11,717)	(2,490)	4,335
Benefits paid	(4,153)	(1,422)	(3,266)	(598)
Consolidation of OAO WGC-2 and  OAO WGC-6 (see Note 33)	-	1,146	-	-
Closing defined benefit obligation	182,590	49,687	207,880	55,344

Changes in the plan assets are as follows:

	31 December 2008		31 December 2007
	Funded benefits - provided through NPF Gazfund	Unfunded liabilities - other benefits	Funded benefits - provided through NPF Gazfund	Unfunded liabilities - other benefits
Opening fair value of plan assets	583,221	-	-	-
Recognition of plan assets   as at 31 March 2007	-	-	590,156	-
Expected return	29,161	-	22,131	-
Actuarial (losses)/gains	(358,806)	-	(33,514)	-
Contributions by employer	7,623	924	7,714	258
Benefits paid	(4,153)	(924)	(3,266)	(258)
Closing fair value of plan assets	257,046	-	583,221	-

The major categories of plan assets as a percentage of total plan assets are as follows:

	31 December 2008	31 December 2007
Equities	58%	79%
Other assets	42%	21%
	100%	100%

For the year ended 31 December 2008 actual return on plan assets was a loss of RR 329,644, caused by the change of the fair value of plan assets. 

Funded status of the plan:

	31 December
	2008	2007
Defined benefit obligation	(182,590)	(207,880)
Plan assets	257,046	583,221
Surplus	74,456	375,341

For 2008 and 2007, experience adjustments on plan assets amounted to RR 358,806 and RR 33,514 loss respectively, and experience adjustments on plan liabilities amounted to RR 124,592 and RR 43,259 loss respectively.

24. EQUITY

Share capital

Share capital authorised, issued and paid in totals RR 325,194 as of 31 December 2008 and 2007 and consists of 23.7 billion ordinary shares, each with a historical par value of 5 Roubles.

Dividends

In 2008, OAO Gazprom accrued and paid dividends in the nominal amount of 2.66 Roubles per share for the year ended 31 December 2007. In 2007, OAO Gazprom accrued and paid dividends in the nominal amount of 2.54 Roubles per share for the year ended 31 December 2006.

Treasury shares

As of 31 December 2008 and 2007, subsidiaries of OAO Gazprom held 30 million and 66 million of the ordinary shares of OAO Gazprom, respectively. Shares of the Group held by the subsidiaries represent 0.1% and 0.3% of OAO Gazprom shares as of 31 December 2008 and 2007, respectively. The Group management controls the voting rights of these shares.

As of 31 December 2007 treasury shares include 50 million of Gazprom shares recognized under a put option written by the Group in November 2007 with a strike price of USD 16.38 per share. Financial liabilities recognized under this put option amounted to RR 18,234 as of 31 December 2007 and were included in "Other non-current liabilities" in the consolidated balance sheet. These treasury shares were held by Gazprombank Group which was deconsolidated from June 2008 (see Note 34).

Retained earnings and other reserves

Included in retained earnings and other reserves are the effects of the cumulative restatement of the consolidated financial statements to the equivalent purchasing power of the Rouble as of 31 December 2002, when Russian economy ceased to be hyperinflationary under IAS 29 "Financial Reporting in Hyperinflation Economies". Also, retained earnings and other reserves include translation gains arising on the translation of the net assets of foreign subsidiaries, associated undertakings and jointly controlled entities in the amount of RR 44,545 and RR 25,325 as of 31 December 2008 and 2007, respectively.

Retained earnings and other reserves include a statutory fund for social assets, created in accordance with Russian legislation at the time of privatisation. From time to time, the Group negotiates to return certain of these assets to governmental authorities and this process may continue. Social assets with a net book value of RR 2,519 and RR 3,897 have been transferred to governmental authorities during the years ended 31 December 2008 and 2007, respectively. These transactions have been recorded as a reduction of retained earnings and other reserves.

The basis of distribution is defined by legislation as the current year net profit of the Group parent company, as calculated in accordance with RAR. For 2008 year, the statutory profit of the parent company was RR 173,022. However, the legislation and other statutory laws and regulations dealing with profit distribution are open to legal interpretation and accordingly management believes at present it would not be appropriate to disclose an amount for the distributable profits and reserves in these consolidated financial statements. 

 

25. SALES

	Year ended 31 December
	2008	2007
Gas sales (including excise tax and custom duties, net of VAT) to customers in:
Russian Federation	479,387	399,452
Former Soviet Union (excluding Russian Federation)	381,902	273,550
Europe and other countries	1,866,933	1,161,549
Gross sales of gas	2,728,222	1,834,551
Excise tax	(81)	(96)
Customs duties	(461,740)	(306,752)
Net sales of gas	2,266,401	1,527,703
Sales of refined products to customers in:
Russian Federation	378,182	300,046
Former Soviet Union (excluding Russian Federation)	44,980	42,181
Europe and other countries	229,794	182,989
Total sales of refined products	652,956	525,216
Sales of crude oil and gas condensate to customers in:
Russian Federation	27,577	31,024
Former Soviet Union (excluding Russian Federation)	26,570	19,586
Europe and other countries	160,808	117,148
Sales of crude oil and gas condensate	214,955	167,758
Electric and heat energy sales:
Russian Federation	131,965	35,251
Former Soviet Union (excluding Russian Federation)	2,370	1,773
Europe and other countries	62,897	12,534
Total electric and heat energy sales	197,232	49,558
Gas transportation sales:
Russian Federation	70,080	41,252
Former Soviet Union (excluding Russian Federation)	605	488
Europe and other countries	-	-
Total gas transportation sales	70,685	41,740
Other revenues:
Russian Federation	99,194	99,419
Former Soviet Union (excluding Russian Federation)	7,685	6,021
Europe and other countries	9,852	5,830
Total other revenue	116,731	111,270
Total sales	3,518,960	2,423,245

26. OPERATING EXPENSES

	Year ended 31 December
	2008	2007
Purchased oil and gas	696,274	382,054
Taxes other than on income	258,971	229,771
Staff costs	240,607	248,894
Depreciation	195,016	183,577
Transit of gas, oil and refined products	185,269	152,093
Repairs and maintenance	152,234	118,058
Cost of goods for resale, including refined products	132,801	56,643
Materials	90,722	94,520
Electricity and heating expenses	48,691	44,901
Research and development	19,952	15,486
Social expenses	18,668	16,343
Rental expenses	15,178	13,568
Insurance expenses	14,637	12,950
Processing services	10,055	10,090
Transportation services	7,485	6,675
Other operating expenses	73,130	128,136
Total operating expenses	2,159,690	1,713,759

Staff costs include RR 16,378 and RR 36,230 of expenses associated with pension obligations (see Note 23) for the years ended 31 December 2008 and 2007, respectively.

Gas purchase expenses included within purchased oil and gas amounted to RR 538,680 and RR 299,465 for the years ended 31 December 2008 and 2007, respectively.

Taxes other than on income consist of:

	Year ended 31 December
	2008	2007
Natural resources production tax	188,494	165,097
Property tax	27,781	21,638
Other taxes	42,696	43,036
	258,971	229,771

 

27. FINANCE INCOME AND EXPENSES

	Year ended 31 December
	2008	2007
Exchange gains	118,746	82,936
Interest income	46,822	75,394
Gains on and extinguishment of restructured liabilities	35	1,050
Total finance income	165,603	159,380

	Year ended 31 December
	2008	2007
Exchange losses	281,269	55,598
Interest expense	59,910	76,975
Total finance expenses	341,179	132,573

28. RECONCILIATION OF PROFIT, DISCLOSED IN CONSOLIDATED STATEMENT OF INCOME, PREPARED IN ACCORDANCE WITH RUSSIAN ACCOUNTING RULES (RAR) TO PROFIT DISCLOSED IN IFRS STATEMENT OF INCOME

	Year ended 31 December
	2008	2007
RAR net profit for the period per consolidated statutory accounts	552,859	543,800
Effects of IFRS adjustments:
Gain on NPF Gazfund deconsolidation	-	44,692
Reclassification of revaluation of RAO UES of Russia and other energy assets (including deferred tax effect of RR nil and RR 3,554,  respectively)	49,411	(18,168)
Elimination of loss (gain) of OAO NOVATEK shares revaluation	80,768	(9,553)
Effect of profit tax rate change	52,230	-
Differences in depreciation	133,348	78,564
Reversal of goodwill depreciation	27,950	25,347
Loan interest capitalized	26,465	19,661
Impairment provision for property, plant and equipment	(51,031)	-
Impairment provision for associated undertakings and jointly controlled entities	(28,181)	-
Other impairment provisions and other provisions	(19,010)	(39,668)
Fair value adjustment for currency options	-	(1,320)
Write-off of research and development expenses capitalized for RAR purposes	(4,317)	(3,402)
Fair value adjustment on commodity contracts	(75)	(2,534)
(Loss)/Gain from change in fair value of call option	(50,738)	50,738
Other effects	1,701	6,828
IFRS profit for the year	771,380	694,985

29. BASIC AND DILUTED EARNINGS PER SHARE ATTRIBUTABLE TO SHAREHOLDERS OF OAO GAZPROM 

Earnings per share have been calculated by dividing the profit, attributable to equity shareholders of OAO Gazprom by the weighted average number of shares outstanding during the period, excluding the weighted average number of ordinary shares purchased by the Group and held as treasury shares (see Note 24). 

There were 23.4 billion weighted average shares outstanding for the years ended 31 December 2008 and 2007.

There are no dilutive financial instruments outstanding.

 30. NET CASH PROVIDED BY OPERATING ACTIVITIES

	Year ended  31 December
	2008	2007
Profit before profit tax	1,031,632	924,204
Adjustments to profit before profit tax
Depreciation	195,016	183,577
Charge for impairment provisions and other provisions	115,342	43,938
Net unrealised foreign exchange loss (gains)	162,523	(27,338)
Interest expense	59,910	76,975
Gains on and extinguishment of restructured liabilities	(35)	(1,050)
Losses on disposal of property, plant and equipment	1,858	9,988
Interest income	(46,822)	(75,394)
Gain on disposal of available-for-sale financial assets	(14,326)	(25,102)
Derivatives gain	(10,762)	(1,723)
Share of net loss (income) from associated undertakings and jointly controlled entities	16,686	(24,234)
Total effect of adjustments	479,390	159,637
Increase in long-term assets	(36,341)	(62,042)
(Decrease) increase in long-term liabilities	(3,246)	987
Gain from sale of interest in subsidiary	-	(50,853)
Loss (gain) from change in fair value of call option	50,738	(50,738)
Non-cash additions and disposals of property, plant and equipment and other long-term financial assets	(76,144)	(116,450)
Deconsolidation of NPF Gazfund	-	(44,692)
	1,446,029	760,053
Changes in working capital
Increase in accounts receivable and prepayments	(245,820)	(21,463)
Increase in inventories	(42,047)	(27,277)
Decrease in other current assets	3,131	2,227
Increase in accounts payable and accrued charges, excluding interest, dividends and capital construction	67,551	70,884
Increase in taxes payable (other than profit tax)	80,772	66,873
Decrease (increase) in available-for-sale financial assets and financial assets held for trading	15,707	(58,752)
Total effect of working capital changes	(120,706)	32,492
Profit tax paid	(308,772)	(194,037)
Net cash provided by operating activities	1,016,551	598,508

Total taxes paid in cash for the years 2008 and 2007:

	Year ended 31 December
	2008	2007
Customs duties	699,253	429,991
Profit tax	308,772	194,037
Natural resources production tax	196,815	163,596
VAT	76,273	68,988
Property tax	30,908	23,801
Unified social tax	29,304	31,546
Personal income tax	28,876	26,693
Excise	22,958	23,573
Other	23,290	18,005
Total taxes paid	1,416,449	980,230

31. SUBSIDIARY UNDERTAKINGS 

Principal subsidiaries 

			% of share capital as of  31 December*
Subsidiary undertaking	Location		2008	2007
ZAO ArmRosgazprom	Armenia		76	53
ООО Arsenal**	Russia		-	100
OOO Aura-Media**	Russia		-	100
OOO Aviapredpriyatie Gazpromavia	Russia		100	100
OAO Azot (Kemerovo)**	Russia		-	75
Benton Solutions Inc.**	Virgin Islands		-	100
OOO Burgaz	Russia		100	100
OAO Daltransgaz	Russia		73	-
Dolby International Holdings Ltd.***	Virgin Islands		100	100
Ecofran Marketing Consulting and Communications Services Company Ltd.**	Cyprus		-	100
OOO Elion**	Russia		-	100
OOO Faktoring-Finance	Russia		90	90
Ferenco Investment Ltd.***	Cyprus		100	100
ZAO Gazenergoprombank	Russia		73	-
OOO Gazflot	Russia		100	100
OOO Gazoenergeticheskaya Companiya	Russia	100		100
OOO Gazprom dobycha Astrakhan	Russia		100	100
OOO Gazprom dobycha Krasnoyarsk (OOO Krasnoyarskgazdobycha)	Russia		100	100
OOO Gazprom dobycha Nadym	Russia		100	100
OOO Gazprom dobycha Noyabrsk	Russia		100	100
OOO Gazprom dobycha Orenburg	Russia		100	100
OOO Gazprom dobycha shelf	Russia		100	-
OOO Gazprom dobycha Urengoy	Russia		100	100
OOO Gazprom dobycha Yamburg	Russia		100	100
OOO Gazprom export	Russia		100	100
Gazprom Finance B.V.	Netherlands		100	100
GAZPROM Germania GmbH	Germany		100	100
Gazprom Global LNG Ltd.	United Kingdom		100	-
OOO Gazprom invest Vostok	Russia		100	100
ZAO Gazprom invest Yug (ZAO Gazpromstroyengineering)	Russia		100	100
OOO Gazprom invest Zapad	Russia		100	100
OOO Gazprom investholding (OOO Gazprominvestholding)	Russia		100	100
OOO Gazprom komplektacya (OOO Gazkomplektimpex)	Russia		100	100
Gazprom Libyen Verwaltungs GmbH	Germany		100	100
Gazprom Marketing and Trading Ltd.	United Kingdom		100	100
OAO Gazprom Neft	Russia		76	76
ZAO Gazprom neft Orenburg (ZAO Stimul)	Russia		100	100
Gazprom Neft Trading GmbH***	Austria		100	100
Gazprom Netherlands B.V.	Netherlands		100	100
ООО Gazprom Pererabotka	Russia		100	100
ООО Gazprom PKhG	Russia		100	100
OOO Gazprom podzemremont Orenburg (OOO Gazprom yugpodzemremont)	Russia		100	100
OOO Gazprom podzemremont Urengoy (OOO Gazprom severpodzemremont)	Russia		100	100
Gazprom Sakhalin Holding B.V.	Netherlands		100	100

31 SUBSIDIARY UNDERTAKINGS (continued)

		% of share capital as of  31 December*
Subsidiary undertaking	Location	2008		2007
OOO Gazprom transgas Ekaterinburg	Russia		100	100
OOO Gazprom transgas Kazan	Russia		100	100
OOO Gazprom transgas Makhachkala	Russia		100	100
OOO Gazprom transgas Moskva	Russia		100	100
OOO Gazprom transgas Nizhny Novgorod	Russia		100	100
OOO Gazprom transgas Samara	Russia		100	100
OOO Gazprom transgas Saratov	Russia		100	100
OOO Gazprom transgas Surgut	Russia		100	100
OOO Gazprom transgas Tchaikovsky	Russia		100	100
OOO Gazprom transgas Tomsk	Russia		100	100
OOO Gazprom transgas Ufa	Russia		100	100
OOO Gazprom transgas Ukhta	Russia		100	100
OOO Gazprom transgas Volgograd	Russia		100	100
OOO Gazprom transgas Yugorsk	Russia		100	100
OOO Gazprom transgas Kuban	Russia		100	100
OOO Gazrpom transgas St. Petersburg	Russia		100	100
OOO Gazprom transgaz Stavropol (OOO Kavkaztransgaz)	Russia	100		100
OOO Gazprom tsentrremont	Russia	100		-
ОOО Gazprombank-Invest**	Russia	-		99
AB GPB-Ipoteka (ZAO)**	Russia	-		99
OAO Gazprom-Media**	Russia	-		100
OOO Gazprom-Media Holding**	Russia	-		100
OOO Gazpromenergo	Russia	100		100
OOO Gazpromneft-Centr (OOO Sibneft-AZS Service)***	Russia	100		100
ООО Gazpromneftfinans***	Russia	100		100
OOO Gazpromneft-Khantos***	Russia	100		100
ZAO Gazpromneft-Kuzbass (ZAO Kuzbassnefteproduct)***	Russia	100		100
OAO Gazpromneft-Noyabrskneftegaz (OAO Sibneft-Noyabrskneftegaz)***	Russia	100		100
OAO Gazpromneft-Omskiy NPZ (OAO Sibneft-Omskiy NPZ)***	Russia	100		100
OAO Gazpromneft-Omsk (OAO Sibneft-Omsknefteproduct)***	Russia	100		100
ZAO Gazpromneft-Severo-Zapad (ZAO Sibneft-Severo-Zapad)***	Russia	100		100
ООО Gazpromneft-Vostok***	Russia	100		100
OOO GazpromPurInvest	Russia	100		100
OAO Gazpromregiongaz	Russia	100		100
ООО Gazpromtrans	Russia	100		100
OAO Gazpromtrubinvest	Russia	99		99
OOO Gaztorgpromstroy	Russia	100		100
OOO Georesurs	Russia	100		-
ZAO Gerosgaz	Russia	51		51
Gregory Trading S.A.***	Virgin Islands	100		100
ООО Jester**	Russia	-		100
Jones Resources Ltd.***	Virgin Islands	100		100
ZAO Kaunasskaya power station	Lithuania	99		99
OOO Kommerts Investments**	Russia	-		100
OAO Krasnodargazstroy	Russia	-		51
ОАО Krasnoyarskgazprom	Russia	75		75
OOO Kubangazprom	Russia	100		100

31 SUBSIDIARY UNDERTAKINGS (continued)

		% of share capital as of  31 December*
Subsidiary undertaking	Location	2008	2007
Leadville Investments Ltd.**	Cyprus	-	100
OAO Lengazspecstroy	Russia	-	63
OOO Mezhregiongaz	Russia	100	100
OAO Mineralnie udobreniya**	Russia	-	51
ОАО Mosenergo	Russia	53	53
ZAO Neftehim-Invest**	Russia	-	100
OOO NK Sibneft-Yugra***	Russia	99	99
OOO Novourengoysky GCC	Russia	100	100
OAO NTV-PLUS**	Russia	-	100
OAO Obshestvenno-delovoy centr Okhta***	Russia	77	84
ZАО Purgaz	Russia	51	51
OOO Regionalnaya finansovaya companiya**	Russia	-	100
OAO Regiongazholding	Russia	56	56
Richard Enterprises S.A.***	Virgin Islands	100	100
ZАО Rosshelf	Russia	57	57
ZAO RSh-Centre	Russia	99	99
OAO Severneftegazprom****	Russia	75	75
OOO Sevmorneftegaz	Russia	100	100
Sib Oil Trade Ltd.***	Virgin Islands	100	100
OOO Sibneft-Chukotka***	Russia	100	100
ОАО AK Sibur**	Russia	-	100
OAO Sibur Holding**	Russia	-	74
OAO Sibur-Mineralnie udobrenia**	Russia	-	100
ZAO Sibur-Motors**	Russia	-	100
OAO Sibur-Neftekhim**	Russia	-	100
OAO Sibur-Russkiye shiny**	Russia	-	100
OAO Sibur-Tyumen**	Russia	-	100
OAO SiburTyumenGaz**	Russia	-	100
OAO Sobinbank	Russia	100	-
ZAO Speccisterni**	Russia	-	100
ОАО Spetsgazavtotrans	Russia	51	51
ОАО Telekompaniya NTV**	Russia	-	100
ОАО Tomskgazprom	Russia	100	100
OOO Tomskneftekhim**	Russia	-	100
ОАО Tsentrenergogaz	Russia	62	62
ОАО Tsentrgaz	Russia	100	100
OOO VNIIGAZ	Russia	100	100
ОАО Vostokgazprom	Russia	99	99
OAO WGC-2*****	Russia	57	-
OAO WGC-6*****	Russia	60	-
ZAO Yamalgazinvest	Russia	100	100
OAO Yaroslavsky shinniy zavod**	Russia	-	88
OOO Yugragazpererabotka**	Russia	-	51
OOO Zapolyarneft***	Russia	100	100
OAO Zapsibgazprom	Russia	77	77

31 SUBSIDIARY UNDERTAKINGS (continued)

		% of share capital as of  31 December*
Subsidiary undertaking	Location	2008	2007
Zarubezhgaz Management und BeteiligungsGesellschaft mbH (ZMB Gmbh)	Germany	100	100
OAO Zavod Benzol**	Russia	-	100
ZGG Cayman Holding Ltd.	Cayman Islands	100	100
ZGG Cayman Ltd.	Cayman Islands	100	100
ZMB (Schweiz) AG	Switzerland	100	100

* Cumulative share of Group companies in charter capital of investments

** Subsidiaries of OAO Gazprombank, OAO Sibur-Holding and Gazprom-Media Group (deconsolidated since June 2008, Note 34)

***  Subsidiaries of OAO Gazprom neft

**** Group's voting shares

***** Controlling interest acquired in 2008 (see Note 33)

32. MINORITY INTEREST

		Year ended 31 December
		2008	2007
Minority interest at the beginning of the year		362,308	161,362
Minority interest share of net profit of subsidiary undertakings		28,452	36,947
Gazprombank Group deconsolidation (see Note 34)		(148,035)	-
Dividends		(6,227)	(9,320)
Translation difference		1,120	-
Minority interest as a result of acquisitions		70,366	173,319
Minority interest at the end of the year		307,984	362,308

33. ACQUISITION OF THE CONTROLLING INTEREST IN OAO WGC-2 and OAO WGC-6

As of 1 July 2008, the Group completed the exchange of its ownership interest in RAO UES of Russia for ownership interests in certain companies, including controlling interests in OAO WGC-2 and OAO WGC-6 and minor interest in other power entities. The Group's controlling interest of 57.3% in OAO WGC-2 and 60.1% in OAO WGC-6 have been accumulated through the payment of cash of RR 16 billion for 12.2% interest in OAO WGC-2 in October 2007 and RR 21 billion for 17.1% interest in OAO WGC-6 in December 2007, respectively and the exchange of RAO UES of Russia shares with a fair value of RR 53 billion in July 2008. The fair value of the RAO UES of Russia shares exchanged for the OAO WGC-2 and OAO WGC-6 shares as of 1 July 2008 was determined by reference to the quoted market prices of the OAO WGC-2 and OAO WGC-6 shares received on 1 July 2008, the date the Group obtained control over OAO WGC-2 and OAO WGC-6.

The Group accounted for the interest owned prior to July 2008 in OAO WGC-2 and OAO WGC-6 as available-for-sale financial assets.

In accordance with IFRS 3 "Business Combinations", the Group recognized the acquired assets and liabilities based upon their fair values. In these financial statements, management revised the preliminary assessment disclosed in interim condensed financial information for the nine months, ended 30 September 2008. Revisions made to the preliminary assessment applied in interim financial information were reflected as of the acquisition date. The Group does not anticipate any material revisions to this revised assessment.

The total purchase consideration primarily includes the total cash paid of RR 37 billion and the fair value of the shares exchanged of RR 53 billion.

The carrying amounts before the acquisition date and recognized assets acquired and liabilities assumed as of the acquisition date are as follows:

33 ACQUISITION OF THE CONTROLLING INTEREST IN OAO WGC-2 and OAO WGC-6 (continued)

	OAO WGC-2 and OAO WGC-6
	Book value 01.07.2008	Attributable fair value
Cash and cash equivalents	1,556	1,556
Accounts receivable and prepayments	4,835	4,835
Inventories	6,434	6,434
Other current assets	13,969	13,969
Current assets	26,794	26,794
Property, plant and equipment	46,631	140,221
Long-term accounts receivable and  prepayments	26,212	26,212
Other non-current assets	3,952	3,952
Non-current assets	76,795	170,385
Total assets	103,589	197,179
Accounts payable and accrued charges	11,048	11,048
Current liabilities	11,048	11,048
Long-term borrowings	7,756	7,756
Deferred tax liabilities	6,283	28,745
Other non-current liabilities	1,029	1,029
Non-current liabilities	15,068	37,530
Total liabilities	26,116	48,578
Net assets at control acquisition date	77,473	148,601
Fair value of net assets at  acquisition date		148,601
Fair value of the Group's interest		86,970
Purchase consideration		89,577
Goodwill		2,607

The acquired entities contributed revenue of RR 41,248 and loss of RR 35,244 to the Group for the period from the date of acquisition to 31 December 2008. If the acquisition had occurred on 1 January 2008, the Group's revenue and profit for the year ended 31 December 2008 would have been RR 3,550,823 and RR 760,499, respectively.

The Group performed impairment testing of assets and liabilities of OAO WGC-2 and OAO WGC-6 as of December 31, 2008 and recorded an impairment loss of RR 44,119 for certain non-financial assets including goodwill of RR 2,607. The impairment loss was primarily due to the effects of fourth quarter 2008 revised projections indicating ownward revisions of projected sales volumes and increased discount rates (see Note 35).

 34. DECONSOLIDATION OF GAZPROMBANK GROUP

As discussed in Note 4 the Group lost the ability to control the financial and operating policies of Gazprombank Group on 24 June 2008. At that date the bank and its subsidiaries were deconsolidated from the financial statements of the Group and the deconsolidation has resulted in the decrease/(increase) in the following line items of the consolidated balance sheet:

Current assets
Cash and cash equivalents	47,242
Restricted cash	14,866
Short-term financial assets	88,277
Accounts receivable and prepayments	252,017
Inventories	21,432
VAT recoverable	8,763
Other current assets	32,602
	465,199
Non-current assets
Property, plant and equipment	72,491
Investments in associated undertakings and jointly controlled entities	46,142
Long-term accounts receivable and prepayments	221,041
Available-for-sale long-term financial assets	20,437
Other non-current assets	15,080
	375,191
Total assets	840,390
Liabilities and equity
Current liabilities
Accounts payable and accrued charges	221,351
Current profit tax payable	195
Other taxes payable	6,100
Short-term borrowings and current portion of long-term borrowings	246,140
Short-term promissory notes payable	25,007
	498,793
Non-current liabilities
Long-term borrowings	164,985
Provisions for liabilities and charges	1,421
Deferred tax liabilities	(5,910)
Other non-current liabilities	18,415
	178,911
Total liabilities	677,704
Equity
Treasury shares	(26,751)
Retained earnings and other reserves	-
	(26,751)
Minority interest	148,035
Total equity	121,284
Total liabilities and equity	798,988
Recognition of investment in Gazprombank Group as investment in associated undertaking	41,402

The deconsolidation of Gazprombank Group did not have a material impact on the consolidated statement of income for the year ended 31 December 2008.

 

35. IMPAIRMENT AND OTHER PROVISIONS

The Group conducted an impairment test of its property plant and equipment, goodwill when applicable, investments in associated undertakings and other assets when there were indicators that these assets may be impaired. The recoverable amount used in the impairment tests has been determined on the basis of the projected cash flows and the value in use of such asset or cash-generating units. 

For non financial assets, the Group conducted an impairment test of its cash-generating units, for which the values in use have been calculated as the present values of projected future cash flows discounted by the Group's weighted average cost of capital, as adjusted, where applicable, to take into account any specific risks of business operations related to the cash-generating units. The Group used discount rates ranging from 10 to 17%. The cash flow projections cover periods commensurate with the production cycles and expected lives of the respective assets. The Group used either steady or declining growth rates to extrapolate cash flows beyond the period, for which the Group usually prepares its budget. Based on the results of this test the Group recognized an impairment loss of RR 51,031 for power generating assets, including goodwill on the acquisition of OAO WGC-2 and OAO WGC-6 (see Note 33). The impairments were primarily triggered by the increase in discount rates, projected reduction in electricity consumption and expected oil and electricity prices. 

Included in the impairment and other provisions are provisions for short-term and long-term accounts receivable in the amount of RR 42,057 and RR 1,348 for the years, ended December 31, 2008 and 2007 respectively and impairment provision for other investments in the amount of RR 2,726 and RR 1,422 for the years, ended December 31, 2008 and 2007. 

For associated undertakings, where there was an indication that the carrying value of investments in associated undertakings might not be recoverable the Group conducted an impairment test of such investments as at December 31, 2008. The total impairment loss, included in share of net income (loss) of associated undertakings and jointly controlled entities of RR 28,181 related primarily due to projected decrease in crude oil and electricity consumption and prices and the increase in discount rates. 

36. RELATED PARTIES

For the purpose of this consolidated financial information, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operational decisions as defined by IAS 24 "Related Party Disclosures". Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties.

The nature of the related party relationships for those related parties with whom the Group entered into significant transactions or had significant balances outstanding as of 31 December 2008 are detailed below. 

Government

The Government of the Russian Federation is the ultimate controlling party of OAO Gazprom and has a controlling interest (including both direct and indirect ownership) of over 50% in OAO Gazprom.

As of 31 December 2008 38.373% of OAO Gazprom issued shares were directly owned by the Government. Another 11.63% were owned by Government controlled entities. The Government does not prepare financial statements for public use. Following the General Meeting of Shareholders in June 2008, the 11 seats on the Board of Directors include six State representatives, three management representatives and two independent directors. Governmental economic and social policies affect the Group's financial position, results of operations and cash flows.

As a condition of privatisation in 1992, the Government imposed an obligation on the Group to provide an uninterrupted supply of gas to customers in the Russian Federation at government controlled prices.

Parties under control of the Government

In the normal course of business the Group enters into transactions with other entities under Government control. Prices of natural gas sales and electricity tariffs in Russia are regulated by the Federal Tariffs Service ("FTS"). Bank loans with related parties are provided on the basis of market rates. Taxes are accrued and settled in accordance with Russian tax legislation.

As of and for the years ended 31 December 2008 and 2007, respectively, the Group had the following significant transactions and balances with the Government and parties under control of the Government: 

36 RELATED PARTIES (continued)

Note		As of 31 December 2008		Year ended  31 December 2008
		Assets	Liabilities	Revenues	Expenses
	Transactions and balances with the Government
	Current profit tax	30,518	6,774	-	307,094
	Unified social tax	558	1,075	-	30,460
	VAT recoverable/payable	199,990	20,134	-	-
	Custom duties	60,841	-	-	-
18	Other taxes	2,565	29,537	-	258,971
	Transactions and balances with other parties under control of the Government
	Gas sales	-	-	95,799	-
	Electricity and heating sales	-	-	78,151	-
	Other services sales	-	-	1,960	-
	Accounts receivable	4,211	-	-	-
	Oil transportation expenses	-	-	-	62,975
	Accounts payable	-	1,955	-	-
	Loans	-	14,610	-	-
	Interest income/expense	-	-	854	1,050
	Short-term financial assets	1,176	-	-	-
	Available-for-sale long-term financial assets	18,319	-	-	-

Note		As of 31 December 2007			Year ended  31 December 2007
		Assets		Liabilities	Revenues	Expenses
	Transactions and balances with the Government
	Current profit tax	9,378		23,033	-	218,266
	Unified social tax	583		1,319	-	31,206
	VAT recoverable/payable	190,560		17,000	-	-
	Custom duties	20,323		-	-	-
18	Other taxes	4,311		32,389	-	229,771
	Transactions and balances with other parties under control of the Government
	Gas sales	-		-	186,705	-
	Electricity sales	-		-	22,296	-
	Other sales	-		-	975
	Accounts receivable	44,373		-	-	-
	Oil transportation expenses	-		-	-	44,542
	Accounts payable	-		21,328	-	-
	Loans	-		28,007	-	-
	Interest income/expense	-		-	1,262	1,413
	Short-term financial assets	15,030		-	-	-
	Investments in associated undertakings and jointly controlled entities	-		-	-	89
	Available-for-sale long-term financial assets	159,211		-	-	-

36 RELATED PARTIES (continued)

Gas sales and respective accounts receivable, oil transportation expenses and respective accounts payable included in the table above are related to major State controlled utility companies. 

In the normal course of business the Group incurs electricity and heating expenses (see Note 26). A part of these expenses relates to purchases from the entities under Government control. Due to specifics of electricity market in Russian Federation, these purchases can not be accurately separated from the purchases from private companies. 

See consolidated statement of changes in equity for returns of social assets to governmental authorities during years ended 31 December 2008 and 2007. See Note 12 for net book values as of December 2008 and 2007 of social assets vested to the Group at privatisation.

See Note 37 for financial guarantees issued by the Group to the associated undertakings and jointly controlled entities.

Compensation for key management personnel

Key management personnel (the members of the Board of Directors and Management Committee of OAO Gazprom) short-term compensation, including salary, bonuses and remuneration for serving on the management bodies of various Group companies, amounted to approximately RR 2,056 and RR 1,697 for the years ended 31 December 2008 and 2007, respectively. Such amounts include personal income tax and are net of unified social tax. Government officials, who are directors, do not receive remuneration from the Group. The remuneration for serving on the Boards of Directors of Group companies is subject to approval by the General Meeting of Shareholders of each Group company. Compensation of key management personnel (other than remuneration for serving as directors of Group companies) is determined by the terms of the employment contracts. Key management personnel also receive certain short-term benefits related to healthcare.

According to Russian legislation, the Group makes contributions to the Russian Federation State pension fund for all of its employees including key management personnel. Key management personnel also participate in certain post-retirement benefit programs. The programs include pension benefits provided by the non-governmental pension fund, NPF Gazfund, and a one-time payment from the Group at their retirement date. The employees of the majority of Group companies are eligible for such benefits.

The Group provided medical insurance and liability insurance for key management personnel. Voluntary medical insurance was RR 1 and RR 1 and liability insurance was RR 2 and nil for the years ended 31 December 2008 and 2007, respectively. 

36 RELATED PARTIES (continued)

Associated undertakings and jointly controlled entities

For the years ended 31 December 2008 and 2007 the Group had the following significant transactions with associated undertakings and jointly controlled entities:

	Year ended 31 December
	2008	2007
Gas sales	Revenues
RosUkrEnergo AG	230,093	157,438
Wintershall Erdgas Handelshaus GmbH & Co.KG	115,317	67,656
ZAO Panrusgaz	74,878	43,179
OAO Beltransgaz**	60,509	-
Wintershall Gas GmbH & Co. KG	56,092	41,251
AO Gazum	26,822	17,001
Wintershall Erdgas Handelshaus Zug AG	25,740	19,031
Promgaz SPA	14,864	8,003
AO Overgaz Inc.	14,088	8,101
GWH - Gaz und Warenhandels GmbH	10,336	6,082
AO Lietuvos Dujos	9,039	5,389
AO Moldovagaz	8,999	6,509
AO Latvijas Gaze	6,533	3,775
АО Turusgaz	5,733	3,100
OAO TGC-1**	5,492	-
ZAO Gazprom YRGM Trading	5,119	307
OAO Mosenergo*	-	19,566
Gas transportation sales
RosUkrEnergo AG	23,455	11,278
OAO NOVATEK	11,262	8,248
ZAO Gazprom YRGM Trading	7,217	486
Crude oil and refined product sales:
OAO NGK Slavneft and its subsidiaries	15,137	14,195
Gas refining services sales:
TOO KazRosGaz	3,735	3,303
Purchased gas	Expenses
RosUkrEnergo AG	39,341	29,880
ZAO Gazprom YRGM Trading	23,901	1,425
TOO KazRosGaz	17,265	13,246
OAO NOVATEK	5,505	3,953
Gas transportation purchases
SGT EuRoPol GAZ S.A.	12,206	11,081
OAO Beltransgaz**	11,864	-
Blue Stream Pipeline Company	7,513	7,300
Crude oil and refined product purchases
OAO NGK Slavneft and its subsidiaries	79,511	64,198
OAO Tomskneft VNK and its subsidiaries**	32,958	-
Processing services purchases
OAO NGK Slavneft and its subsidiaries	5,816	5,013

* OAO Mosenergo is consolidated from the moment of acquisition of controlling interest in May 2007.

** Financial information reported from the date of investment made.

Gas is sold to associated undertakings in the Russian Federation mainly at the rates established by the FTS. Gas is sold outside the Russian Federation (except for that sold to RosUkrEnergo AG) under long-term contracts based on world commodity prices.

36 RELATED PARTIES (continued)

As of 31 December 2008 and 2007 the Group had the following significant balances with associated undertakings and jointly controlled entities:

	As of 31 December 2008			As of 31 December 2007
	Assets	Liabilities		Assets	Liabilities
Short-term accounts receivable and
prepayments
RosUkrEnergo AG	76,514	-		57,446	-
Wintershall Gas GmbH & Co. KG	13,888	-		14,833	-
Wintershall Erdgas Handelshaus  Zug AG	11,925	-		12,439	-
ZAO Panrusgaz	11,341	-		6,583	-
OAO Beltransgaz	8,664	-		-	-
AO Gazum	4,322	-		2,868	-
OAO NGK Slavneft and its subsidiaries	4,313	-		2,516	-
AO Moldovagaz*	3,274	-		1,260	-
OAO Salavatnefteorgsyntez	2,493	-		-	-
Wintershall Erdgas Handelshaus  GmbH & Co.KG	1,783	-		4,078	-
OAO Sibur Holding and its subsidiaries	1,589	-		-	-
SGT EuRoPol GAZ S.A.	1,295	-		1,105	-
ZAO Gazprom YRGM Trading	2,196	-		-	-
OAO Gazprombank	1,077	-		-	-
Cash balances in associated undertakings:
OAO Gazprombank	161,255	-		-	-
Long-term accounts
receivable and prepayments
Wintershall Gas GmbH & Co. KG	11,721	-		10,163	-
OAO Sibur Holding and its subsidiaries	3,587	-		-	-
SGT EuRoPol GAZ S.A.	3,555	-		3,955	-
RosUkrEnergo AG	-	-		6,947	-
Long term promissory notes:
OAO Gazprombank	2,536	-		-	-
Short-term accounts payable
Wintershall Gas GmbH & Co. KG	-	9,239		-	3,245
RosUkrEnergo AG	-	9,176		-	2,001
ZAO Gazprom YRGM Trading	-	4,591		-	-
SGT EuRoPol GAZ S.A.	-	4,470		-	2,456
OAO Sibur Holding and its subsidiaries	-	2,756		-	-
TOO KazRosGaz	-	1,994		-	1,787
OAO NGK Slavneft and its subsidiaries	-	1,580		-	4,242
OAO Beltransgaz	-	1,351		-	-
OAO NOVATEK	-	1,111		-	375
Long-term accounts payable:
OAO Sibur Holding and subsidiaries	-	3,627		-	-
ST loans from associated undertakings:
OAO Gazprombank	-	7,875		-	-
OAO Tomskneft VNK and its subsidiaries	-	8,478		-	-
Wintershall Erdgas Handelshaus  GmbH & Co.KG	-	2,344		-	1,770
LT Loans from associated undertaking:
OAO Gazprombank	-	9,513		-	-

* Net of impairment provision on accounts receivable in the amount of RR 37,125 and RR 27,821 as of 31 December 2008 and 2007, respectively.

Investments in associated undertakings and jointly controlled entities are disclosed in Note 12.

See Note 37 for financial guarantees issued by the Group on behalf of associated undertakings and jointly controlled entities.

37. СOMMITMENTS AND CONTINGENCIES

Financial guarantees 

	31 December 2008	31 December  2007
Outstanding guarantees issued on behalf of:
BSPC	24,092	24,352
MRK Energy DMCC	6,959	-
EM Interfinance Limited	5,823	-
Devere Capital International Limited	5,691	-
ZAO Achimgaz	4,961	4,591
Blackrock Capital Investments Limited	4,934	-
OAO Group E4	3,562	-
Nord Stream AG	2,536	-
Gaztransit	1,294	1,346
DSL Assets International Limited	888	-
United Energy Investments Limited	887	-
Gazprom Libya B.V.	-	4,467
Other	25,701	59,484
	87,328	94,240

Historically counterparties fulfilled their contractual obligations. The maximum exposure to credit risk in relation to financial guarantees is RR 87,328 and RR 94,240 as of 31 December 2008 and 2007, respectively.

Included in financial guarantees are amounts denominated in USD of USD 1,587 million and USD 1,348 million as of 31 December 2008 and 31 December 2007, respectively.

In July 2005 Blue Stream Pipeline Company B.V. (BSPC) refinanced some of the existing liabilities, guaranteed by the Group, by means of repayment of the liabilities to a group of Italian and Japanese banks. For the purpose of this transaction loans in the amount of USD 1,185.3 million were received from Gazstream S.A. The Group guaranteed the above loans. As of 31 December 2008 and 31 December 2007, outstanding amounts of these loans were RR 23,052 (USD 785 million) and RR 23,652 (USD 964 million), respectively, which were guaranteed by the Group, pursuant to its obligations.

As of 31 December 2008 and 31 December 2007, BSPC also borrowed RR 1,040 (USD 35 million) and RR 700 (USD 29 million) of credit facilities, provided by Depfa Investment Bank Ltd., which were guaranteed by the Group.

In 2007 the Group provided a guarantee to Wintershall Vermogens-Verwaltungsgesellschaft mbH on behalf of ZAO Achimgaz as a security of loans received and used for additional financing of the pilot implementation of the project on the development of Achimsky deposits of the Urengoy field. The Group's liability with respect to loans is limited by 50% in accordance with the ownership interest in ZAO Achimgaz. As of 31 December 2008 and 31 December 2007 the above guarantee amounted to RR 4,961 (Euro 120 million) and RR 4,591 (Euro 128 million), respectively.

In January 2008 the Group provided a guarantee to Europipe GmbH, supplier of large-diameter steel pipes, on behalf of Nord Stream AG related to pipe supply contract for construction of Nord Stream pipeline. As of 31 December 2008, the above guarantee amounted to RR 2,536 (Euro 61 million). 

In April 2008 the Group provided a guarantee to Credit Suisse International and National Reserve bank (OAO) on behalf of MRK Energy DMCC related to loan received by MRK Energy DMCC. The purpose of the loan is financing of construction of gas pipeline "Kudarsky pereval - Tskhinval" (South Ossetia). As of 31 December 2008 the outstanding amount of this guarantee was RR 6,959.

In 2006 the Group guaranteed loans issued by five financing entities (Devere Capital International Limited, Blackrock Capital Investments Limited, DSL Assets International Limited, United Energy Investments Limited, EM Interfinance Limited). These companies were special purpose entities of Gazprombank Group, which beared risks, associated with the loans. Following the deconsolidation of Gazprombank Group and because the Group remains a guarantor, the guarantees provided by the Group are reported as guarantees to third parties. The guarantees amounted to RR 18,223 (USD 620 million) as of 31 December 2008.

37 СOMMITMENTS AND CONTINGENCIES (continued)

In May 2008 the Group provided a guarantee to OAO Bank of Moscow on behalf of OAO Group E4 as a security of loans for obligations under contracts for delivering of power units. As of 31 December 2008, the outstanding amount of this guarantee was RR 3,562 (Euro 86 million).

Other guarantees of the Group included guarantees, issued by OAO Sobinbank to third parties in the amount of RR 8,267 as of 31 December 2008.

Other guarantees of the Group included guarantees mainly issued by OAO Gazprombank to third parties in the amount of RR 54,122 as of 31 December 2007. In January 2007, OAO Gazprombank provided guarantees to OAO Sberbank on behalf of OAO Sibneftegaz. As of 31 December 2007, the outstanding amount of these guarantees was RR 5,934.

In August 2007, OAO Gazprombank provided a guarantee to OAO LUKOIL-Nizhegorodnefteorgsintez on behalf of OAO Lukoil-NORSI-Invest. As of 31 December 2007, the outstanding amount was RR 5,308. 

In 2007, OAO Gazprombank provided a guarantee to former owners of OAO Salavatnefteorgsyntez shares on behalf of ZAO Lider with respect to its purchase of interest in OAO Salavatnefteorgsyntez. As of 31 December 2007, the total outstanding amount was RR 16,525.

Capital commitments

In December 2008 the Board of Directors approved a RR 920 billion investment programme for 2009. Currently the company is reviewing the investment program.

Supply commitments

The Group has entered into long-term supply contracts for periods ranging from 5 to 20 years with various companies operating in Europe. The volumes and prices in these contracts are subject to change due to various contractually defined factors. As of 31 December 2008 no loss is expected to result from these long-term commitments.

38. OPERATING RISKS

Operating environment

The operations and earnings of the Group continue, from time to time and in varying degrees, to be affected by political, legislative, fiscal and regulatory developments, including those related to environmental protection, in the Russian Federation. Due to the capital-intensive nature of the industry, the Group is also subject to physical risks of various kinds. It is impossible to predict the nature and frequency of these developments and events associated with these risks as well as their effect on future operations and earnings.

Despite strong economic growth in recent years, the financial situation in the Russian market significantly deteriorated during 2008, particularly in the fourth quarter. As a result of global volatility in financial and commodity markets, among other factors, there has been a significant decline in the Russian stock market since mid-2008. Since September 2008, there has been increased volatility in currency markets and the Russian Rouble (RR) has depreciated significantly against some major currencies. The official US Dollar (USD) exchange rate of the Central Bank of the Russian Federation ("CBRF") increased from RR 25.37 as of 1 October 2008 to RR 29.38 as of 31 December 2008.

The commodities market was also impacted by the latest events on the financial markets. The spot Free On Board price of Urals oil decreased from USD 91.15 as of 29 September 2008 to USD 41.83 as of 31 December 2008. 

The future economic direction of the Russian Federation is largely dependent upon the world economic situation, effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments. 

Legal proceedings

The Group is a party to certain legal proceedings arising in the ordinary course of business. Additionally, the Group is subject to various environmental laws regarding handling, storage, and disposal of certain products and is subject to regulation by various governmental authorities. In the opinion of management, there are no current legal proceedings or other claims outstanding which could have a material adverse effect on the results of operations or financial position of the Group.

38 OPERATING RISKS (continued)

Taxation

The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations and frequent changes. Tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments. 

Management believes that its interpretation of the relevant legislation as of 31 December 2008 is appropriate and all of the Group's tax, currency and customs positions will be sustainable.

Group changes

The Group is continuing to be subject to reform initiatives in the Russian Federation and in some of its export markets. The future direction and effects of any reforms are the subject of political considerations. Potential reforms in the structure of the Group, tariff setting policies, and other government initiatives could each have a significant, but undeterminable, effect on enterprises operating in the Group.

Environmental matters

The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognised immediately. Potential liabilities which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be reliably estimated, but could be material. In the current enforcement climate under existing legislation, the Group management believes that there are no significant liabilities for environmental damage, other than amounts that have been accrued in the consolidated financial statements.

Social commitments

The Group significantly contributes to the maintenance and upkeep of the local infrastructure and the welfare of its employees in the areas of its production operations mainly in the northern regions of Russian Federation, including contributions toward the construction, development and maintenance of housing, hospitals, transport services, recreation and other social needs.

Financial crisis and economic downturn

The ongoing global financial crisis has resulted in, among other things, a lower level of capital market funding, lower liquidity levels across the banking sector and wider economy, and, at times, higher interbank lending rates and very high volatility in stock and currency markets. The uncertainties in the global financial market, have also led to bank failures and bank rescues in the United States of America, Western Europe and in Russia. In this context, in 2008 the Group has also obtained shares in certain Russian banks. 

The full extent of the impact of the ongoing financial crisis is difficult to foresee and the Group remains exposed to adverse changes that would result from the crisis. The availability of external funding in financial markets has significantly reduced since August 2007. Such circumstances affect the ability of the Group to obtain new borrowings and re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions (see Note 40). The debtors of the Group may also be affected by the lower liquidity situation which could in turn impact their ability to repay their outstanding payables. 

Deteriorating operating conditions for debtors have an impact on management's cash flow forecasts and assessment of the impairment of financial and non-financial assets (see Note 35). Management has reflected their best estimates of expected future cash flows in their impairment assessments.

The net pension assets included into other non-current assets are also exposed to the decline in the market price of certain investments made by NPF Gazfund (see Note 23).

Management is unable to estimate reliably the effects on the Group's financial position of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets. Management believes it is taking all the necessary measures to support the sustainability and growth of the Group's business in the current circumstances.

The Group is exposed to deteriorating economic conditions resulting from general economic downturn, decline in demand for certain commodities and decline in oil prices. These new market conditions have an impact on medium term cash flow forecast and assessment of potential impairment of financial and non-financial assets. As of 31 December 2008 management has updated the Group's medium and long-term cash-flow forecasts and impairment assessment (see Note 35). 

39   FINANCIAL RISK FACTORS 

The Group's activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group's overall risk management focuses on the unpredictability of financial markets and seeks to reduce potential adverse effects on the financial performance of the Group. 

Risks are managed centrally and to some extent at the level of subsidiaries in accordance with Group policies. 

Market risk

Market risk is a risk that changes in market prices, such as foreign currency exchange rates, interest rates, commodity prices and prices of marketable securities, will affect the Group's financial results or the value of its holdings of financial instruments. 

 (a) Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the US dollar and the Euro. Foreign exchange risk arises from assets, liabilities, commercial transactions and financing denominated in foreign currencies.

The carrying amounts of the Group's financial instruments are denominated in the following currencies:

Notes		Russian Rouble	US dollar	Euro	Other	Total
	As of 31 December 2008
	Financial assets
	Current
	Cash and cash equivalents	184,344	114,319	39,533	5,637	343,833
	Short-term financial assets	23,365	-	83	-	23,448
10	Trade and other accounts receivable	185,075	207,100	83,346	31,775	507,296
	Non-current
14	Long-term accounts receivable	136,643	10,413	310	-	147,366
	Available for sale long-term  financial assets	43,210	-	4,976	-	48,186
	Total financial assets	572,637	331,832	128,248	37,412	1,070,129
	Financial liabilities
	Current
17	Accounts payable and accrued  charges	308,564	85,137	26,091	21,712	441,504
	Short-term borrowings and current portion of long-term  borrowings	111,257	273,429	47,011	943	432,640
	Short-term promissory notes  payable	8,052	-	-	-	8,052
	Non-current
	Long-term borrowings	74,548	496,303	352,282	97	923,230
	Long-term promissory notes  payable	1,718	-	-	-	1,718
	Total financial liabilities	504,139	854,869	425,384	22,752	1,807,144

39 FINANCIAL RISK FACTORS (continued)

Notes		Russian Rouble	US dollar	Euro	Other	Total
	As of 31 December 2007
	Financial assets
	Current
	Cash and cash equivalents	161,507	63,892	46,147	7,563	279,109
	Short-term financial assets	111,103	1,790	199	819	113,911
10	Trade and other accounts receivable	365,938	124,598	76,817	10,002	577,355
	Non-current
14	Long-term accounts receivable	253,951	14,490	1,989	-	270,430
	Available for sale long-term  financial assets	246,828	6,000	1,853	1,529	256,210
	Total financial assets	1,139,327	210,770	127,005	19,913	1,497,015
	Financial liabilities
	Current
17	Accounts payable and accrued  charges	378,802	44,857	34,668	14,292	472,619
	Short-term borrowings and current portion of long-term  borrowings	158,704	313,520	30,460	1,386	504,070
	Short-term promissory notes  payable	21,455	-	-	-	21,455
	Non-current
	Long-term borrowings	135,773	563,070	282,565	-	981,408
	Long-term promissory notes  payable	3,555	-	-	-	3,555
	Total financial liabilities	698,289	921,447	347,693	15,678	1,983,107

The Group manages its net exposure to foreign exchange risk by balancing both financial assets and financial liabilities denominated in selected foreign currencies.

As of 31 December 2008, if the Russian Rouble had weakened by 30% against the US dollar with all other variables held constant, profit before tax would have been lower by RR 155,194, mainly as a result of foreign exchange gains on translation of US dollar-denominated trade receivables and foreign exchange losses on translation of US dollar-denominated borrowings. As of 31 December 2007, if the Russian Rouble had weakened by 10% against the US dollar with all other variables held constant, profit before tax would have been lower by RR 71,668. Profit is more sensitive to movement in RR/US dollar exchange rates in 2008 than in 2007 because of the increased amount of the US dollar denominated borrowings. The effect of a corresponding strengthening of the Russian Rouble against the US dollar is approximately equal and opposite.

As of 31 December 2008, if the Russian Rouble had weakened by 30% against Euro with all other variables held constant, profit before tax would have been lower by RR 90,552 mainly as a result of foreign exchange gains on translation of euro-denominated trade receivables and foreign exchange losses on translation of euro-denominated borrowings. As of 31 December 2007, if the Russian Rouble had weakened by 5% against Euro with all other variables held constant, profit before tax would have been lower by RR 11,127. The effect of a corresponding strengthening of the Russian Rouble against Euro is approximately equal and opposite.

39 FINANCIAL RISK FACTORS (continued)

(b) Cash flow and fair value interest rate risk

The Group is exposed to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The Group's interest rate risk primarily arises from long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The table below summarises the balance between long-term borrowings at fixed and at variable interest rates:

Long-term borrowings	31 December
	2008	2007
At fixed rate	914,937	869,194
At variable rate	247,312	386,357
Total	1,162,249	1,255,551

The Group does not have a formal policy of determining how much of the Group's exposure should be to fixed or variable rates. However, the Group performs periodic analysis of the current interest rate environment and depending on that analysis at the time of raising new debts management makes decisions whether obtaining financing on fixed-rate or variable-rate basis would be more beneficial to the Group over the expected period until maturity. 

During 2008 and 2007, the Group's borrowings at variable rates were mainly denominated in US dollar and Euro.

At 31 December 2008, if interest rates on US dollar and Euro denominated borrowings at these dates had been 2.0% higher with all other variables held constant, profit before tax would have been lower by RR 4,946 mainly as a result of higher interest expense on floating rate borrowings. At 31 December 2007, if interest rates on US dollar and Euro denominated borrowings at these dates had been 1.0% higher with all other variables held constant, profit before tax would have been lower by RR 3,864. The effect of a corresponding decrease in interest rate is approximately equal and opposite.

 (c) Commodity price risk

Commodity price risk is the risk or uncertainty arising from possible movements in prices for natural gas, crude oil and related products, and their impact on the Group's future performance and results of operations. A decline in the prices could result in a decrease in net income and cash flows. An extended period of low prices could precipitate a decrease in development activities and could cause a decrease in the volume of reserves available for transportation and processing through the Group's systems or facilities and ultimately impact the Group's ability to deliver under its contractual obligations.

The Group's overall strategy in production and sales of natural gas, crude oil and related products is centrally managed. Substantially all the Group's natural gas, gas condensate and other hydrocarbon export sales to Europe and other countries are sold under long-term contracts. Natural gas export prices to Europe and other countries are based on a formula linked to world oil product prices, which in turn are linked to world crude oil prices.

The Group's exposure to the commodity price risk is related essentially to the export market (see Note 25). The Russian gas tariffs are regulated by the Federal Tariffs Service and are as such less subject to significant price fluctuations.

The Group assesses on regular basis the potential scenarios of future fluctuation in commodity prices and their impacts on operational and investment decisions.

However, in the current environment management estimates may materially differ from actual future impact on the Group's financial position.

(d) Securities price risk

The Group is exposed to movements in the equity securities prices because of investments held by the Group and classified on the consolidated balance sheet either as available for sale or at fair value through profit or loss (Note 15).

At 31 December 2008, if RTS equity index, which affects on the major part of Group's equity securities, had decreased by 60% with all other variables held constant, assuming the Group's equity instruments moved according to the historical correlation with the index, group's profit before tax for the year would have been RR 32,685 lower.

39 FINANCIAL RISK FACTORS (continued)

At 31 December 2007, if RTS equity index, which affects on the major part of Group's equity securities, had decreased on 40% with all other variables held constant, assuming the Group's equity instruments moved according to the historical correlation with the index, group's profit before tax for the year would have been RR 5,447 lower and other components of equity would have been RR 42,786 lower. 

To manage price risk arising from other investments in equity securities, the Group's banking subsidiaries diversify their investment portfolios.

The Group is also exposed to equity securities prices used to assess the fair value of pension plan assets held by NPF Gazfund (see Note 23). 

Credit risk

Credit risk refers to the risk exposure that a potential financial loss to the Group may occur if counterparty defaults on its contractual obligations. The maximum exposure to credit risk is the value of the assets which might be lost.

Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to wholesale and retail customers, including outstanding receivables and committed transactions. 

Financial instruments, which potentially subject the Group to concentrations of credit risk, primarily consist of accounts receivable including promissory notes. Credit risks related to accounts receivable are systematically monitored taking into account customer's financial position, past experience and other factors.

Management systematically reviews ageing analysis of receivables and uses this information for calculation of impairment provision (see Note 10). Credit risk exposure mainly depends on the individual characteristics of customers, more particularly customers default risk and country risk. The Group's customer portfolio is diversified with a limited concentration.

Although collection of accounts receivable could be influenced by economic factors affecting these customers, management believes there is no significant risk of loss to the Group beyond the provisions already recorded. 

Cash and cash equivalents are deposited only with banks that are considered by the Group to have a minimal risk of default.

The Group's maximum exposure to credit risk is presented in the table below. 

	31 December
	2008	2007
Cash and cash equivalents	343,833	279,109
Debt securities	21,431	100,293
Trade and other accounts receivable	657,798	847,784
Financial guarantees	87,328	94,240
Total maximum exposure to credit risk	1,110,390	1,321,426

Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities. Due to the dynamic nature of the underlying businesses, management aims to maintain flexibility in funding by keeping committed funds available. The Group liquidity is managed centrally. The management of the Group monitors the planned cash inflow and outflow. 

The Group has access to a wide range of funding through capital markets and banks. Management aim is to maintain flexibility in financing sources by having undrawn committed facilities available.

The Group believes that it has significant funding through the commercial paper markets or through undrawn committed borrowing facilities to meet foreseeable borrowing requirements. 

39 FINANCIAL RISK FACTORS (continued)

However, the consequences of the ongoing global financial and economic crisis affect the ability of the Group to obtain new borrowings and re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions. 

In April 2009 the Group issued USD 2,250 million Loan Participation Notes due in 2019 at an interest rate 9.25% and CHF 500 million Loan Participation Notes due in 2011 at an interest rate 9% (see Note 40).

The table below analyses the Group's financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.

	Less than 6 months	Between 6 and 12 months	Between 1 and 2 years	Between 2 and 5 years	Over 5 years
As of 31 December 2008
Loans and borrowings	245,676	186,964	181,615	267,294	474,321
Trade and other payables	428,872	12,632	-	-	-
As of 31 December 2007
Loans and borrowings	312,881	191,189	241,754	356,741	662,374
Trade and other payables	456,855	15,764	-	-	-

See discussion of financial derivatives in Note 22. 

The Group's borrowing facilities do not usually include financial covenants which could trigger accelerated reimbursement of financing facilities. 

Capital risk management

The Group considers equity and debt to be the principal elements of capital management. The Group's objectives when managing capital are to safeguard the Group's position as a leading global energy company by further increasing the reliability of natural gas supplies and diversifying activities in the energy sector, both in the domestic and foreign markets.

In order to maintain or adjust the capital structure, the Group may revise its investment program, attract new or repay existing loans and borrowings, sell certain non-core assets.

On the Group level capital is monitored on the basis of the net debt to adjusted EBITDA ratio. This ratio is calculated as net debt divided by adjusted EBITDA. Net debt is calculated as total debt (short-term borrowings and current portion of long-term borrowings, short-term promissory notes payable, long-term borrowings, long-term promissory notes payable and restructured tax liabilities) less cash and cash equivalents and balances of cash and cash equivalents restricted as to withdrawal under the terms of certain borrowings and other contractual obligations.

Adjusted EBITDA is calculated as operating profit less depreciation and less provision for impairment of assets (excluding provisions for accounts receivable and prepayments).

The net debt to adjusted EBITDA ratios at 31 December 2008 and 2007 were as follows:

	31 December
	2008	2007
Total debt	1,365, 764	1,510,666
Less: cash and cash equivalents and certain restricted cash	(347,418)	(282,083)
Net debt	1,018,346	1,228,583
Adjusted EBITDA	1,463,805	891,715
Net debt/Adjusted EBITDA ratio	0.70	1.38

39 FINANCIAL RISK FACTORS (continued)

OAO Gazprom presently has an investment grade credit ratings of BBB (stable outlook) by Standard & Poor's, Baa1 (positive) by Moody's Investor Services, and BBB (stable outlook) by Fitch Ratings. To maintain the credit ratings, management of the Group is enhancing efficiency of its business activities by internal restructuring and managerial improvement.

40. POST BALANCE SHEET EVENTS

Significant deterioration in domestic currency 

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the US dollar and the Euro. The Group has significant foreign currency denominated receivables and borrowings.

The official Russian Rouble ("RR") to US dollar ("USD") exchange rates as determined by the Central Bank of the Russian Federation increased from 29.38 to 33.55 in the period from 31 December 2008 to 29 April 2009. The official RR to Euro exchange rates as determined by the Central Bank of the Russian Federation increased from 41.44 to 43.66 in the period from 31 December 2008 to 29 April 2009.

Investments

In February 2009 the Group acquired 51% interest in Naftna Industrija Srbije for Serbian dinars 38 billion (Euro 400 million) paid in cash. 

In February 2009 the Group acquired 12.5% interest in OAO Beltransgas for USD 625 million. As a result the Group increased its interest in OAO Beltransgas up to 37.5%.

On 24 April 2009 the Group exercised the option agreement with ENI S.p.A. to purchase the additional 20% interest in OAO Gazprom Neft for USD 4.1 billion. In the result of this transaction the Group has increased its interest in OAO Gazprom Neft to 95.68%. The Group obtained credits from a group of banks in order to finance the transaction. 

Borrowings and loans

In January 2009 the Group obtained a credit from GK Vneshekonombank in the amount of USD 375 million due in 2010 at an interest rate of 10.75%. 

In February 2009 the Group obtained a credit from Sberbank in the amount of USD 724 million due in 2010 at fixed interest rate of 10.25%.

In Mach 2009 the Group obtained the second tranche from GK Vneshekonombank in the amount of USD 150 million due in 2010 at an interest rate of LIBOR + 5% to refinance part of the loan from Calyon Credit Agricole CIB obtained in September and November 2007. 

In Mach 2009 the Group obtained two loans from White Nights Finance B.V. in the amount of USD 500 million and USD 800 million due in 2014 at an interest rate of 10.5%.

In April 2009 the Group obtained a credit from Sberbank in the amount of USD 3,000 million due in 2014 at an interest rate of 10%.

In April 2009 the Group obtained a loan from OAO Russian Agricultural Bank in the amount of USD 600 million due in 2014 at an interest rate of 10%.

In April 2009 the Group obtained a loan from GPB Credit Risk Management S.A. in the amount of USD 600 million due in 2014 at an interest rate of 10%.  

In April 2009 the Group issued USD 2,250 million Loan Participation Notes due in 2019 at an interest rate 9.25% and CHF 500 million Loan Participation Notes due in 2011 at an interest rate 9% under the USD 30,000 million Programme for the Issuance of Loan Participation Notes.

In April 2009 the Group issued bonds in the amount of RR 10,000 due in 2019 at an interest rate of 16.7% with two years buy-back put option.

The Company may be contacted at its registered office:

OAO Gazprom Nametkina str., 16 V-420, GSP-7, 117997, MoscowRussia

Telephone:  (7 495) 719 3001

Facsimile: (7 495) 719 8333, 719 8335

www.gazprom.ru (in Russian)

www.gazprom.com (in English)

ENDFR ILFELSIIAFIA